Michael Armstrong

th edition10

HUMAN RESOURCE MANAGEMENTPRACTICE

A Handbook of

Now in its tenth edition, this internationally best-selling text has been fully updated toincorporate new developments in human resource management policy and research.

Based on the latest HRM theory, A Handbook of Human Resource Management Practiceconsiders the HR function in relation to the needs of the business as a whole.Thoroughlyupdated in the light of current best practice and drawing on new research, the handbookpresents in-depth coverage of:

managing people; performance management; HRM processes; human resource development; work and employment; rewarding people; organizational behaviour; employee relations; organization, design and development; health, safety and welfare; people resourcing; employment and HRM services.

The book also now includes sections on human capital management, the role of the front-linemanager, developing and implementing HR strategies, and learning and development.

Recognizing HRM as a strategic process, Michael Armstrong provides practical advice on howcompanies can maximize the effectiveness of the HRM function and ensure that it makes amajor contribution to organizational success.This comprehensive handbook is also essentialreading for HRM students at both undergraduate and postgraduate levels.

FREE CD ROM FOR LECTURERSMichael Armstrong has created a unique CD ROM containing over 400 lecture presentation slides.

This CD is available from the publisher on request.

Michael Armstrong is a Companion and former Chief Examiner of the CharteredInstitute of Personnel and Development (CIPD), joint managing partner of e-reward and anindependent management consultant. He is the author of several best-selling HR titlesincluding Performance Management, Strategic Human Resource Management, A Handbook ofManagement and Leadership (with Tina Stephens), Job Evaluation and Reward Management (withHelen Murlis), all published by Kogan Page.

Kogan Page120 Pentonville RoadLondon N1 9JNUnited Kingdomwww.kogan-page.co.uk

35.00US $65.00

Kogan Page US525 South 4th Street, #241Philadelphia PA 19147USA

Human resources

HU

MAN

RESOURCE

MAN

AGEMEN

TPRACTICE

MichaelArmstrong

10TH EDITION

A Handbook of

Hndbk HRM Prac 10 PB aw 12/5/06 9:57 am Page 1

HUMANRESOURCE

MANAGEMENTPRACTICE

A Handbook of

London and Philadelphia

Michael Armstrong

HUMANRESOURCE

MANAGEMENTPRACTICE

A Handbook of

10TH EDITION

First published by Kogan Page Limited as A Handbook of Personnel Management Practice in 1977Second edition 1984Third edition 1988Fourth edition 1991Fifth edition 1995Sixth edition 1996Seventh edition published by Kogan Page Limited as A Handbook of Human Resource Management Practice

in 1999Eighth edition 2001Ninth edition 2003Tenth edition 2006

Apart from any fair dealing for the purposes of research or private study, or criticism or review, aspermitted under the Copyright, Designs and Patents Act 1988, this publication may only be reproduced,stored or transmitted, in any form or by any means, with the prior permission in writing of thepublishers, or in the case of reprographic reproduction in accordance with the terms and licences issuedby the CLA. Enquiries concerning reproduction outside these terms should be sent to the publishers atthe undermentioned addresses:

120 Pentonville Road 525 South 4th Street, #241London N1 9JN Philadelphia, PA 19147United Kingdom USAwww.kogan-page.co.uk

Michael Armstrong, 1977, 1984, 1988, 1991, 1995, 1996, 1999, 2001, 2003, 2006

The right of Michael Armstrong to be identified as the author of this work has been asserted by him inaccordance with the Copyright, Designs and Patents Act 1988.

British Library Cataloguing in Publication Data

A CIP record for this book is available from the British Library.

ISBN 0 7494 4631 5

Library of Congress Cataloging-in-Publication Data

Armstrong, Michael, 1928-A handbook of human resource management practice/Michael Armstrong.10th ed.

p.cm.Includes bibliographical references and index.ISBN 0-7494-4631-5

1. Personnel managementHandbooks, manuals, etc. I. Title.HF5549.17.A76 2006658.3dc22

2005032487

Typeset by Jean Cussons Typesetting, Diss, NorfolkPrinted and bound in Great Britain by Cambridge University Press

Contents

List of figures xviiList of tables xxiAbout the author xxiiiPreface xxv

PART I MANAGING PEOPLE

1 Human resource management 3Human resource management defined 3; Human resource system 4;Models of HRM 5; Aims of HRM 8; Policy goals of HRM 10;Characteristics of HRM 11; Reservations about HRM 15; HRM andpersonnel management 18; How HR impacts on organizationalperformance 20; HRM in context 24

2 Human capital management 29Human capital management defined 29; Human capital managementand human resource management 30; The concept of human capital 33;Human capital management: practice and strategy 36; Human capitalmeasurement 37; Human capital reporting 47

3 Role of the HR function 53The overall role of the HR function 54; The role of HR in facilitating andmanaging change 54; Variations in the practice of HR 56; Organizing theHR function 57; Marketing the HR function 59; Preparing, justifying andprotecting the HR budget 60; Outsourcing HR work 61; Shared HRservices 63; Using management consultants 64; Evaluating the HRfunction 66

4 The role of the HR practitioner 71The basic roles 71; Models of the practitioners of HR 76; Gaining supportand commitment 81; Ethical considerations 84; Professionalism in HRM85; Ambiguities in the role of HR practitioners 87; Conflict in the HRcontribution 88; The competencies required by HR professionals 89

5 Role of the front-line manager 93The basic role 93; The line manager and people management 94; Therespective roles of HR and line management 95; The line managers rolein implementing HR policies 97; How to improve front-line managers aspeople managers 98

6 International HRM 99International HRM defined 99; Issues in international HRM 99;International organizational models 100; Convergence and divergence 101; Cultural diversity 102; Think globally and act locally 104; International HR policies 104; Managing expatriates 104

PART II HUMAN RESOURCE MANAGEMENT PROCESSES

7 Strategic HRM 113The concept of strategy 113; Strategic HRM defined 115; Aims ofstrategic HRM 116; Approaches to strategic HRM 117; Implementingstrategic HRM 121

8 HR strategies 123HR strategies defined 123; Purpose 124; The distinction betweenstrategic HRM and HR strategies 124; Types of HR strategies 124;Criteria for an effective HR strategy 129

vi Contents

9 Developing and implementing HR strategies 131Propositions about the development process 132; Levels of strategicdecision-making 132; Strategic options and choices 133; Approaches to HR strategy development 134; Methodology for strategy development 140; Conducting a strategic review 141; Setting out thestrategy 143; Implementing HR strategies 143

10 HRM policies 147What human resource policies are 147; Why have HR policies 147; Dopolicies need to be formalized? 148; HR policy areas 148; FormulatingHR policies 156; Implementing HR policies 157

11 Competency-based HRM 159Types of competencies 160; Competency frameworks 161; Reasons forusing competencies 163; Coverage of competencies 164; Use ofcompetencies 165; Developing a competency framework 167; Definingtechnical competencies 169; Keys to success in using competencies 169;Emotional intelligence 170

12 Knowledge management 173Knowledge management defined 174; The concept of knowledge 175;The purpose and significance of knowledge management 176;Approaches to knowledge management 176; Knowledge managementsystems 178; Knowledge management issues 178; The contribution ofHR to knowledge management 180

13 Analysing roles, competencies and skills 181Role analysis 187; Competency analysis 193; Skills analysis 198

PART III WORK AND EMPLOYMENT

14 The nature of work 205What is work? 205; Theories about work 206; Organizational factors affecting work 208; Changing patterns of work 210; Unemployment 212;Attitudes to work 212; Job-related well-being 212

Contents vii

15 The employment relationship 215The employment relationship defined 215; Nature of the employmentrelationship 215; Basis of the employment relationship 217; Defining theemployment relationship 217; Significance of the employmentrelationship concept 218; Changes in the employment relationship 218;Managing the employment relationship 218; Trust and the employmentrelationship 220

16 The psychological contract 225The psychological contract defined 225; The significance of thepsychological contract 227; The nature of the psychological contract 228;How psychological contracts develop 229; The changing nature of thepsychological contract 231; The state of the psychological contract 233;Developing and maintaining a positive psychological contract 234; Thestate of the psychological contract 2004 235

PART IV ORGANIZATIONAL BEHAVIOUR

17 Characteristics of people 239Individual differences 239; Attitudes 244; Influences on behaviourat work 244; Attribution theory how we make judgements aboutpeople 245; Orientation to work 246; Roles 247; Implications for HRspecialists 248

18 Motivation 251The process of motivation 252; Types of motivation 253; Motivationtheory 254; Instrumentality theory 254; Content (needs) theory 255;Process theory 258; Herzbergs two-factor model 262; The relationshipbetween motivation, job satisfaction and money 263; Job satisfaction 264;Motivation and money 267; Motivation strategies 268

19 Organizational commitment and engagement 271The concepts of commitment and engagement 271; Organizationalcommitment 273; Influences on commitment and employeesatisfaction 279; Engagement 281

viii Contents

20 How organizations function 283Basic considerations 283; Organization theories 283; Organizationstructure 288; Types of organization 289; Organizational processes 292

21 Organizational culture 303Definitions 303; The significance of culture 305; How organizationalculture develops 306; The diversity of culture 306; The components ofculture 307; Classifying organizational culture 309; Assessingorganizational culture 311; Measuring organizational climate 312;Appropriate cultures 313; Supporting and changing cultures 314

PART V ORGANIZATION, DESIGN AND DEVELOPMENT

22 Organization design 319The process of organizing 319; Aim 320; Conducting organizationreviews 321; Organization analysis 321; Organization diagnosis 322;Organization planning 324; Responsibility for organization design 325

23 Job design and role development 327Jobs and roles 327; Factors affecting job design 328; Job design 330; Jobenrichment 332; Self-managing teams 333; High-performance workdesign 334; Role development 334

24 Organizational development, change and transformation 337What is organizational development? 337; Organization development 338; Change management 343; Organizationaltransformation 352; Development and change processes 355

PART VI PEOPLE RESOURCINGPeople resourcing defined 359; People resourcing and HRM 359;Plan 361

25 Human resource planning 363The role of human resource planning 363; Aims of human resourceplanning 368; The process of human resource planning 368; Resourcingstrategy 371; Scenario planning 372; Estimating future human resourcerequirements 373; Labour turnover 375; Action planning 382; Thecontribution of HR to human resource planning 388

Contents ix

26 Talent management 389Talent management defined 390; The elements of talent management 390; Creating a great place to work 394; Attractionstrategies 395; Retention strategies 397; Career management 399; Talent management for knowledge workers 407; Talent management in practice 407

27 Recruitment and selection 409The recruitment and selection process 409; Defining requirements 409;Attracting candidates 414; Advertising 416; E-recruitment 420;Outsourcing recruitment 423; Educational and training establishments 424; Application forms 425; Sifting applications 425;Selection methods 429; Types of interviews 430; Assessment centres 430;Graphology 431; Choice of selection methods 432; Improving theeffectiveness of recruitment and selection 432; References, qualifications and offers 434; Final stages 436

28 Selection interviewing 439Purpose 439; Advantages and disadvantages of interviews 440; The nature of an interview 441; Interviewing arrangements 442;Preparation 443; Timing 444; Planning and structuring interviews 444;Interviewing approaches 445; Interview techniques starting andfinishing 450; Interviewing techniques asking questions 450; Selectioninterviewing skills 457; Coming to a conclusion 458; Dos and donts ofselection interviewing 459

29 Selection tests 461Psychological tests: definition 461; Purpose of psychological tests 461;Characteristics of a good test 462; Types of test 463; Interpreting testresults 467; Choosing tests 468; The use of tests in a selection procedure 468

30 Introduction to the organization 471Induction defined 471; Why taking care about induction is important 472;Reception 473; Documentation 474; Company induction initialbriefing 475; Introduction to the workplace 475; Formal inductioncourses 476; On-the-job induction training 477

x Contents

31 Release from the organization 479General considerations 479; Redundancy 482; Outplacement 485;Dismissal 487; Voluntary leavers 490; Retirement 490

PART VII PERFORMANCE MANAGEMENT

32 The basis of performance management 495Performance management defined 495; Aims of performancemanagement 496; Characteristics of performance management 496;Understanding performance management 497; Guiding principles ofperformance management 499; Performance appraisal and performancemanagement 500; Views on performance management 500

33 The process of performance management 503Performance management as a process 503; Performance management asa cycle 503; Performance agreements 504; Managing performancethroughout the year 508; Reviewing performance 509; Ratingperformance 512; Dealing with under-performers 515; Introducingperformance management 517

34 360-degree feedback 521360-degree feedback defined 521; Use of 360-degree feedback 522;Rationale for 360-degree feedback 523; 360-degree feedback methodology 524; Development and implementation 526; 360-degreefeedback advantages and disadvantages 527; 360-degree feedback criteria for success 528

PART VIII HUMAN RESOURCE DEVELOPMENT

35 Strategic human resource development 533Strategic HRD defined 533; Strategic HRD aims 534; Components ofHRD 534; HRD and HRM 535; The process of learning anddevelopment 535; Strategies for HRD 536; Human resource developmentphilosophy 537

36 Organizational learning and the learning organization 539Organizational learning 540; The learning organization 543

Contents xi

37 How people learn 549Learning defined 549; The learning process 550; Learning theory 550;Learning styles 552; Learning to learn 554; The learning curve 554; Themotivation to learn 555; The implications of learning theory andconcepts 556

38 Learning and development 559Learning 559; Development 570; Training 575

39 E-learning 583What is e-learning? 583; Aim of e-learning 584; The technology ofe-learning 584; The e-learning process 585; The business case fore-learning 586; Developing e-learning processes 588

40 Management development 591Aims of management development 592; Management development:needs and priorities 592; The requirements, nature and elements ofmanagement development 593; Management development activities 594;Approaches to management development 596; Emotional intelligenceand leadership qualities 602; Responsibility for managementdevelopment 603

41 Formulating and implementing learning and development strategies 607Making the business case 607; Developing a learning culture 609;Identifying learning needs 610; Planning and implementing learning anddevelopment programmes 612; Evaluation of learning 615

PART IX REWARDING PEOPLE

42 Reward management 623Reward management defined 623; The aims of reward management 624;The philosophy of reward management 624; The elements of rewardmanagement 625; Total reward 629; Reward management for directorsand executives 634; Reward management for sales staff 636; Payingmanual workers 636

xii Contents

43 Strategic reward 643Reward strategy defined 643; Why have a reward strategy? 644; Thestructure of reward strategy 644; The content of reward strategy 645;Guiding principles 649; Developing reward strategy 649; Components ofan effective reward strategy 651; Reward strategy priorities 652;Examples of reward strategies 653; Implementing reward strategy 656;Reward strategy and line management capability 657

44 Job evaluation 659Job evaluation defined 660; Analytical job evaluation 660; Non-analyticaljob evaluation 664; The incidence of job evaluation 666; Computer-assisted job evaluation 667; Criteria for choice 668; The case for andagainst job evaluation 671; Designing a point-factor job evaluationscheme 672; Conclusions 679

45 Market rate analysis 681Purpose 681; The concept of the market rate 681; The informationrequired 682; Job matching 682; Presentation of data 683; Sources ofinformation 683

46 Grade and pay structures 689Grade structure defined 689; Pay structure defined 690; Guidingprinciples for grade and pay structures 690; Types of grade and paystructure 691; Designing grade and pay structures 698

47 Contingent pay 707Contingent pay defined 708; The incidence of contingent pay 708; Thenature of individual contingent pay 709; Individual contingent pay as amotivator 709; Arguments for and against individual contingent pay 710;Alternatives to individual contingent pay 712; Criteria for success 713;Performance-related pay 713; Competence-related pay 714;Contribution-related pay 716; Skill-based pay 718; Service-related pay 720; Choice of approach 721; Readiness for individual contingentpay 721; Developing and implementing individual contingent pay 724;Team-based pay 724; Organization-wide schemes 725

Contents xiii

48 Employee benefits, pensions and allowances 729Employee benefits 729; Occupational pension schemes 731; Allowancesand other payments to employees 734

49 Managing reward systems 737Reward budgets and forecasts 737; Evaluating the reward system 739;Conducting pay reviews 740; Control 744; Reward procedures 745;Responsibility for reward 746; Communicating to employees 748

PART X EMPLOYEE RELATIONSEmployee relations defined 751; Plan 752

50 The framework of employee relations 753The elements of employee relations 754; Industrial relations as a system of rules 754; Types of regulations and rules 755; Collectivebargaining 756; The unitary and pluralist views 758; The reconciliation ofinterests 759; Individualism and collectivism 759; Voluntarism and itsdecline 759; The HRM approach to employee relations 761; The contextof industrial relations 762; Developments in industrial relations 763; Theparties to industrial relations 766; Role of the HR function in employeerelations 771

51 Employee relations processes 773Employee relations policies 774; Employee relations strategies 778;Employee relations climate 779; Union recognition and de-recognition 781; Collective bargaining arrangements 783; Informalemployee relations processes 788; Other features of the industrialrelations scene 789; Managing with trade unions 791; Managing without trade unions 792

52 Negotiating and bargaining 795The nature of negotiating and bargaining 795; Negotiating 796;Negotiating and bargaining skills 803

xiv Contents

53 Employee voice 807The concept of employee voice 807; Involvement and participation 808;Purposes of employee voice 808; The framework for employee voice 808;Expression of employee voice 809; Factors affecting choice 810; Forms ofemployee voice 810; Joint consultation 811; Attitude surveys 812;Suggestion schemes 814; Planning for voice 815

54 Communications 817Communication areas and objectives 819; Communications strategy 819;Communication systems 821

PART XI HEALTH, SAFETY AND WELFARE

55 Health and safety 829Managing health and safety at work 830; The importance of healthand safety in the workplace 830; Benefits of workplace health and safety 831; Health and safety policies 832; Conducting riskassessments 833; Health and safety audits 836; Safety inspections 838;Occupational health programmes 838; Managing stress 839; Accidentprevention 841; Measuring health and safety performance 841;Communicating the need for better health and safety practices 842;Health and safety training 843; Organizing health and safety 843

56 Welfare services 845Why provide welfare services? 845; What sort of welfare services? 847;Individual services 848; Group welfare services 851; Provision ofemployee welfare services 851; Internal counselling services 852;Employee assistance programmes 852

PART XII EMPLOYMENT AND HRM SERVICES

57 Employment practices 857Terms and conditions and contracts of employment 858; Mobility clauses 860; Transfer practices 860; Promotion practices 861; Flexibleworking 862; Attendance management 863; Equal opportunity 866;Ethnic monitoring 867; Managing diversity 868; The Data Protection Act 869; Sexual harassment 870; Smoking 872; Substanceabuse at work 873; Bullying 873; AIDS 874; E-mails 874; Work-lifebalance 875

Contents xv

58 HRM procedures 879Grievance procedure 880; Disciplinary procedure 881; Capabilityprocedure 883; Redundancy procedure 885

59 Computerized human resource information systems 889Benefits of a computerized human resource information system 890; HR information strategy 890; The functions of a computerized HRsystem 891; The technical infrastructure 892; Rating of system features 892; An effective system 893; Problems and how to deal withthem 894; Developing a computerized HR information system 895;Applications 899; Auditing the system 906

Appendix: Example of an attitude survey 907References 911Subject index 953Author index 977

xvi Contents

List of figures

0.1 Route map xxvi0.2 Relationship between aspects of people management 21.1 HRM activities 51.2 The Human Resource Cycle 61.3 The Harvard Framework for Human Resource Management 71.4 Model of the link between HRM and performance 232.1 The Sears Roebuck Model: Employee-Customer-Profit chain 412.2 The balanced scorecard 432.3 The EFQM model 442.4 Human capital external reporting framework 492.5 Human capital reporting dashboard for area managers: Nationwide 514.1 Types of personnel management 784.2 The changing role of the HR practitioner 799.1 Strategic review sequence 14213.1 Example of a role profile 19215.1 Dimensions of the employment relationship 21616.1 A model of the psychological contract 23018.1 The process of motivation 25318.2 Motivation model 26020.1 Channels of communication within groups 29425.1 The process of human resource planning 370

25.2 A survival curve 37826.1 The elements of talent management 39126.2 Career progression curves 40126.3 The process of career management 40126.4 Management succession schedule 40426.5 Competence band career progression system 40526.6 Career paths in a career family structure 40626.7 Talent acquisition and development at Centrica 40827.1 Person specification for an HR officer 41227.2 Example of an application form (compressed) 42627.3 Accuracy of some methods of selection 43328.1 Part of a critical-incident interview for sales people 44828.2 Behavioural-based interview set 44929.1 A normal curve 46733.1 The performance management cycle 50434.1 360-degree feedback model 52234.2 360-degree feedback profile 52535.1 Components of human resource development 53436.1 Single- and double-loop learning 54136.2 Managing learning to add value; the learning cycle 54237.1 The Kolb learning cycle 55237.2 A standard learning curve 55537.3 Different rates of learning 55537.4 A stepped learning curve 55638.1 Stages in preparing and implementing a personal development plan 57238.2 Impact of development 57538.3 Systematic training model 57739.1 A blended learning programme 58741.1 Learning needs analysis areas and methods 61141.2 A learning specification 61342.1 Reward management: elements and interrelationships 63042.2 The components of total reward 63142.3 Model of total reward 63343.1 A reward gap analysis 64643.2 Reward philosophy and guiding principles at B&Q 65043.3 A model of the reward strategy development process 65143.4 Reward strategy priorities 65243.5 The Norwich Union Insurance Progression, Performance & Pay 654

framework

xviii List of figures

43.6 Integrated reward model Kwik-fit 65544.1 A paired comparison 66544.2 A typical job evaluation programme 67544.3 Design sequence 67646.1 A narrow, multi-graded structure 69246.2 A broad-graded structure 69346.3 Narrow and broad-banded structures 69446.4 A broad-banded structure with zones 69446.5 A job family structure 69446.6 A career family structure 69646.7 A pay spine 69746.8 Type of grade and pay structure 70146.9 Flow chart: design of a new grade and pay structure 70547.1 Incidence of contingent pay schemes 70847.2 Line of sight model 71347.3 Performance-related pay 71347.4 Competence-related pay 71447.5 Contribution pay model (1) 71647.6 Contribution pay model (2) 71647.7 Contribution-related pay 71747.8 Contribution-related pay model (Shaw Trust) 71850.1 Employee relations: reconciliation of interests 76052.1 Negotiating range within a settlement range 79952.2 Negotiating range with a negotiating gap 80052.3 Stages of a negotiation 80153.1 A framework for employee voice 809

List of figures xix

List of tables

1.1 Similarities and differences between HRM and personnel management 191.2 Outcomes of research on the link between HR and organizational

performance 214.1 Competency framework for HR professionals 904.2 Key competency areas 919.1 Linking HR and competitive strategies 1369.2 HRM best practices 13711.1 Incidence of different competency headings 16214.1 Feelings at work 21316.1 Job satisfaction 23518.1 Summary of motivation theories 25618.2 Motivation strategies 26919.1 The Hay Group model of engaged performance 28225.1 Survival rate analysis 37825.2 Leavers by length of service 38032.1 Performance appraisal compared with performance management 50137.1 The implications of learning theory and concepts 55738.1 Characteristics of formal and informal learning 56541.1 Use of learning activities 61541.2 Use of evaluation tools 619

42.1 Economic theories explaining pay levels 62642.2 Summary of payment and incentive arrangements for sales staff 63742.3 Comparison of shopfloor payment-by-result schemes 63943.1 Examples of reward strategies and their derivation 65644.1 Comparison of approaches to job evaluation 66945.1 Summary of sources of market data 68646.1 Summary analysis of different grade and pay structures 69947.1 Comparison of individual contingent pay schemes 72250.1 Contrasting dimensions of industrial relations and HRM 76154.1 Communication areas and objectives 82059.1 Computer system problems and solutions 894

xxii List of tables

About the author

Michael Armstrong is an honours graduate in economics from the London School ofEconomics, a Companion of the Chartered Institute of Personnel and Developmentand a Fellow of the Institute of Management Consultancy.

This book is largely based on Michael Armstrongs hands-on experience as apersonnel practitioner, initially in the engineering industry, specializing in industrialrelations, and then in the engineering and food industries as an employee develop-ment specialist.

For 12 years he was an executive director with responsibility for HR in a largepublishing firm and for three years of that period also acted as general manager foran operating division. For a further 10 years he headed up the HR consultancy divi-sion of Coopers & Lybrand. He is Managing Partner of e-reward.uk and also practisesas an independent consultant. This experience has been supplemented recently by anumber of research projects carried out on behalf of the Chartered Institute ofPersonnel and Development. These covered the personnel functions contribution tothe bottom line, strategic HRM, incentive pay, job evaluation, team rewards, broad-banded pay structures, and performance management. He was Chief ExaminerEmployee Reward for the CIPD from 19972001.

His publications for Kogan Page include Reward Management, Performance Manage-ment, How to Be an Even Better Manager, A Handbook of Management Techniques and AHandbook of Employee Reward, Management and Leadership.

Preface

This tenth edition of A Handbook of Human Resource Management Practice containsmany additions and revisions. It refers to major developments in HR practice in thelast two to three years such as the development of the theory and practice of humancapital management, talent management and approaches to learning and develop-ment, all covered in new or substantially revised chapters. Reference is also made to anumber of significant research projects including those conducted by the CIPD, IESand e-reward. Chapters on the following subjects have been either wholly replaced orextensively revised in the light of new concepts of good practice, the experience of theauthor as a practitioner and the outcomes of research:

human resource management; role of the HR function; role of the HR practitioner; strategic human resource management; competency-based HRM; the delivery of learning and training; performance management; reward management fundamentals; grade and pay structures.

The plan of the handbook is illustrated in the route map shown in Figure 0.1.

xxvi Preface

3 Role of HR function4 Role of HR practitioner5 Role of line manager

II HRM processes

7 Strategic HRM8 HR strategies9 Developing HR strategies

10 HRM policies11 Competency-based HRM12 Knowledge management13 Analysing roles,

competencies and skills

V Organization

22 Organization design

23 Job and role design

24 Organizationdevelopment

VI People resourcing

25 Human resourceplanning

26 Talent management

27 Recruitment andselection

28 Selection tests29 Introduction to the

organization30 Release from the

organization

VII Performancemanagement

32 Basis of performancemanagement

33 Performancemanagementprocesses

34 360-degree feedback

VIII Human resourcedevelopment

35 Strategic HRD36 Organizational

learning37 How people learn38 Learning and

development39 E-learning40 Management

development41 Learning and

developmentstrategies

IX Rewardingpeople

42 Reward management

43 Strategic reward44 Job evaluation45 Market rate

analysis46 Grade and pay

structures47 Contingent pay48 Employee benefits49 Managing reward

systems

X Employeerelations

50 Framework ofemployee relations

51 Employee relationsprocesses

52 Negotiating andbargaining

53 Employee voice54 Communications

XI Health, safetyand welfare

55 Health and safety56 Welfare services

XII Employment andHRM services

57 Employmentpractices

58 HRM procedures59 Computerised

HR informationsystems

Factors affecting HRM strategypolicy and practice

III Work and employment14 The nature of work15 The employment relationship16 The psychological contractIV Organizational behaviour17 Characteristics of people18 Motivation19 Commitment and engagement20 How organizations function21 Organizational culture

I People management1 Human resource management2 Human capital management

HRM strategy,policy andpractice

6 International HRM

Figure 0.1 Route map

Managing people

This part underpins the rest of the Handbook. It deals with the approaches and philosophiesthat affect how people are managed in organizations, the roles of the HR function and itsmembers, and the special considerations that affect international people management. Theterm people management embraces the two related concepts of human resource management(HRM) and human capital management (HCM), which are defined and explained in the firsttwo chapters. These have virtually replaced the term personnel management, although thephilosophies and practices of personnel management still provide the foundations for thephilosophy and practices of HRM and HCM. The relationships between these aspects of peoplemanagement are modelled in Figure 0.2.

Part I

2 Managing people

People management

The policies and practices which governhow people are managed and developedin organizations.

Human resource management

A strategic and coherent approach to themanagement of an organizations mostvalued assets the people working therewho individually and collectively contributeto the achievement of its objectives.

Human capital management

An approach to obtaining, analysing andreporting on data which informs the direc-tion of value-adding people managementstrategic investment and operational deci-sions at corporate level and at the level offront line management.

Personnel management

Personnel management is concerned withobtaining, organizing and motivating thehuman resources required by the enter-prise.

(Armstrong, 1977)

Figure 0.2 Relationship between aspects of people management

Human resource management

The terms human resource management (HRM) and human resources (HR) havelargely replaced the term personnel management as a description of the processesinvolved in managing people in organizations. The concept of HRM underpins all theactivities described in this book, and the aim of this chapter is to provide a frameworkfor what follows by defining the concepts of HRM and an HR system, describing thevarious models of HRM and discussing its aims and characteristics. The chaptercontinues with a review of reservations about HRM and the relationship betweenHRM and personnel management and concludes with a discussion of the impactHRM can make on organizational performance.

HUMAN RESOURCE MANAGEMENT DEFINED

Human resource management is defined as a strategic and coherent approach to themanagement of an organizations most valued assets the people working there whoindividually and collectively contribute to the achievement of its objectives.

Storey (1989) believes that HRM can be regarded as a set of interrelated policieswith an ideological and philosophical underpinning. He suggests four aspects thatconstitute the meaningful version of HRM:

1

1. a particular constellation of beliefs and assumptions;2. a strategic thrust informing decisions about people management;3. the central involvement of line managers; and4. reliance upon a set of levers to shape the employment relationship.

HUMAN RESOURCE SYSTEM

Human resource management operates through human resource systems that bringtogether in a coherent way:

HR philosophies describing the overarching values and guiding principles adoptedin managing people.

HR strategies defining the direction in which HRM intends to go. HR policies, which are the guidelines defining how these values, principles and

the strategies should be applied and implemented in specific areas of HRM. HR processes consisting of the formal procedures and methods used to put HR

strategic plans and policies into effect. HR practices comprising the informal approaches used in managing people. HR programmes, which enable HR strategies, policies and practices to be imple-

mented according to plan.

Becker and Gerhart (1996) have classified these components into three levels: thesystem architecture (guiding principles), policy alternatives and processes and prac-tices.

See Figure 1.1.

MODELS OF HRM

The matching model of HRMOne of the first explicit statements of the HRM concept was made by the MichiganSchool (Fombrun et al, 1984). They held that HR systems and the organization struc-ture should be managed in a way that is congruent with organizational strategy(hence the name matching model). They further explained that there is a humanresource cycle (an adaptation of which is illustrated in Figure 1.2), which consists offour generic processes or functions that are performed in all organizations. These are:

1. selection matching available human resources to jobs;

4 Managing people

2. appraisal performance management;3. rewards the reward system is one of the most under-utilized and mishandled

managerial tools for driving organizational performance; it must reward shortas well as long-term achievements, bearing in mind that business must performin the present to succeed in the future;

4. development developing high quality employees.

Human resource management 5

Organization Resourcing

Human resourceplanning

Recruitment andselection

Talentmanagement

HR services

HRdevelopment

Rewardmanagement

Employeerelations

Design OrganizationallearningJob evaluation/Market surveys

Industrialrelations

Development IndividuallearningGrade and pay

structures Employee voice

Job/roledesign

Managementdevelopment Contingent pay Communications

Performancemanagement

Employeebenefits

Health/safetyand welfare

Knowledgemanagement

Human capitalmanagement

HUMAN RESOURCEMANAGEMENT

Figure 1.1 HRM activities

The Harvard frameworkThe other founding fathers of HRM were the Harvard School of Beer et al (1984) whodeveloped what Boxall (1992) calls the Harvard framework. This framework isbased on the belief that the problems of historical personnel management can only besolved:

when general managers develop a viewpoint of how they wish to see employeesinvolved in and developed by the enterprise, and of what HRM policies and practicesmay achieve those goals. Without either a central philosophy or a strategic vision which can be provided only by general managers HRM is likely to remain a set ofindependent activities, each guided by its own practice tradition.

Beer and his colleagues believed that Today, many pressures are demanding abroader, more comprehensive and more strategic perspective with regard to the orga-nizations human resources. These pressures have created a need for: A longer-termperspective in managing people and consideration of people as potential assets ratherthan merely a variable cost. They were the first to underline the HRM tenet that itbelongs to line managers. They also stated that: Human resource managementinvolves all management decisions and action that affect the nature of the relation-ship between the organization and its employees its human resources.

6 Managing people

Selection Performancemanagement Performance

Rewards

Development

Figure 1.2 The Human Resource Cycle (adapted from Fombrun et al, 1984)

The Harvard school suggested that HRM had two characteristic features: 1) linemanagers accept more responsibility for ensuring the alignment of competitivestrategy and personnel policies; 2) personnel has the mission of setting policies thatgovern how personnel activities are developed and implemented in ways that makethem more mutually reinforcing. The Harvard framework as modelled by Beer et al isshown in Figure 1.3.

According to Boxall (1992) the advantages of this model are that it:

incorporates recognition of a range of stakeholder interests; recognizes the importance of trade-offs, either explicitly or implicitly, between

the interests of owners and those of employees as well as between various interestgroups;

widens the context of HRM to include employee influence, the organization ofwork and the associated question of supervisory style;

Human resource management 7

Stakeholderinterests: shareholders management employees government unions

Situationalfactors: work force

characteristics business

strategy andconditions

managementphilosophy

labour market unions task technology laws and social

values

HR outcomes: commitment congruence cost

effectiveness

Long-termconsequences individual well-

being organizational

effectiveness societal well-

being

HRM policychoices: employee

influence human resource

flow reward systems work systems

Figure 1.3 The Harvard Framework for Human Resource Management (Source:Beer et al, 1984)

acknowledges a broad range of contextual influences on managements choice ofstrategy, suggesting a meshing of both product-market and socio-cultural logics;

emphasizes strategic choice it is not driven by situational or environmentaldeterminism.

The Harvard model has exerted considerable influence over the theory and practiceof HRM, particularly in its emphasis on the fact that HRM is the concern of manage-ment in general rather than the personnel function in particular.

AIMS OF HRM

The overall purpose of human resource management is to ensure that the organiza-tion is able to achieve success through people. As Ulrich and Lake (1990) remark:HRM systems can be the source of organizational capabilities that allow firms tolearn and capitalize on new opportunities. Specifically, HRM is concerned withachieving objectives in the areas summarized below.

Organizational effectivenessDistinctive human resource practices shape the core competencies that determinehow firms compete (Cappelli and Crocker-Hefter, 1996). Extensive research hasshown that such practices can make a significant impact on firm performance. HRMstrategies aim to support programmes for improving organizational effectiveness bydeveloping policies in such areas as knowledge management, talent managementand generally creating a great place to work. This is the big idea as described byPurcell et al (2003), which consists of a clear vision and a set of integrated values.More specifically, HR strategies can be concerned with the development of contin-uous improvement and customer relations policies.

Human capital managementThe human capital of an organization consists of the people who work there and onwhom the success of the business depends. Human capital has been defined byBontis et al (1999) as follows:

Human capital represents the human factor in the organization; the combined intelli-gence, skills and expertise that give the organization its distinctive character. The humanelements of the organization are those that are capable of learning, changing, innovatingand providing the creative thrust which if properly motivated can ensure the long-termsurvival of the organization.

8 Managing people

Human capital can be regarded as the prime asset of an organization and businessesneed to invest in that asset to ensure their survival and growth. HRM aims to ensurethat the organization obtains and retains the skilled, committed and well-motivatedworkforce it needs. This means taking steps to assess and satisfy future people needsand to enhance and develop the inherent capacities of people their contributions,potential and employability by providing learning and continuous developmentopportunities. It involves the operation of rigorous recruitment and selection proce-dures, performance-contingent incentive compensation systems, and managementdevelopment and training activities linked to the needs of the business (Becker et al,1997). It also means engaging in talent management the process of acquiring andnurturing talent, wherever it is and wherever it is needed, by using a number of inter-dependent HRM policies and practices in the fields of resourcing, learning and devel-opment, performance management and succession planning.

The process of human capital management (HCM) as described in the nextchapter is closely associated with human resource management. However, thefocus of HCM is more on the use of metrics (measurements of HR and people perfor-mance) as a means of providing guidance on people management strategy andpractice.

Knowledge managementKnowledge management is any process or practice of creating, acquiring, capturing,sharing and using knowledge, wherever it resides, to enhance learning and perfor-mance in organizations (Scarborough et al, 1999). HRM aims to support the develop-ment of firm-specific knowledge and skills that are the result of organizationallearning processes.

Reward managementHRM aims to enhance motivation, job engagement and commitment by introducingpolicies and processes that ensure that people are valued and rewarded for what theydo and achieve and for the levels of skill and competence they reach.

Employee relationsThe aim is to create a climate in which productive and harmonious relationships canbe maintained through partnerships between management and employees and theirtrade unions.

Human resource management 9

Meeting diverse needsHRM aims to develop and implement policies that balance and adapt to the needs ofits stakeholders and provide for the management of a diverse workforce, taking intoaccount individual and group differences in employment, personal needs, work styleand aspirations and the provision of equal opportunities for all.

Bridging the gap between rhetoric and realityThe research conducted by Gratton et al (1999) found that there was generally a widegap between the sort of rhetoric expressed above and reality. Managements may startwith good intentions to do some or all of these things but the realization of them theory in use is often very difficult. This arises because of contextual and processproblems: other business priorities, short-termism, limited support from linemanagers, an inadequate infrastructure of supporting processes, lack of resources,resistance to change and lack of trust. An overarching aim of HRM is to bridge thisgap by making every attempt to ensure that aspirations are translated into sustainedand effective action. To do this, members of the HR function have to remember that itis relatively easy to come up with new and innovatory policies and practice. Thechallenge is to get them to work. They must appreciate, in the phrase used by Purcellet al (2003) that it is the front line managers who bring HR policies to life, and actaccordingly.

POLICY GOALS OF HRM

The models of HRM, the aims set out above and other definitions of HRM have beendistilled by Caldwell (2004) into 12 policy goals:

1. Managing people as assets that are fundamental to the competitive advantage ofthe organization.

2. Aligning HRM policies with business policies and corporate strategy.3. Developing a close fit of HR policies, procedures and systems with one another.4. Creating a flatter and more flexible organization capable of responding more

quickly to change.5. Encouraging team working and co-operation across internal organizational

boundaries.6. Creating a strong customer-first philosophy throughout the organization.7. Empowering employees to manage their own self-development and learning.

10 Managing people

8. Developing reward strategies designed to support a performance-drivenculture.

9. Improving employee involvement through better internal communication.10. Building greater employee commitment to the organization.11. Increasing line management responsibility for HR policies.12. Developing the facilitating role of managers as enablers.

CHARACTERISTICS OF HRM

The characteristics of the HRM concept as they emerged from the writings of thepioneers and later commentators are that it is:

diverse; strategic with an emphasis on integration; commitment-oriented; based on the belief that people should be treated as assets (human capital); unitarist rather than pluralist, individualistic rather than collective in its approach

to employee relations; a management-driven activity the delivery of HRM is a line management

responsibility; focused on business values.

The diversity of HRMBut these characteristics of HRM are by no means universal. There are many models,and practices within different organizations are diverse, often only corresponding tothe conceptual version of HRM in a few respects.

Hendry and Pettigrew (1990) play down the prescriptive element of the HRMmodel and extend the analytical elements. As pointed out by Boxall (1992), such anapproach rightly avoids labelling HRM as a single form and advances more slowlyby proceeding more analytically. It is argued by Hendry and Pettigrew that betterdescriptions of structures and strategy-making in complex organizations, and offrameworks for understanding them, are an essential underpinning for HRM.

A distinction was made by Storey (1989) between the hard and soft versions ofHRM. The hard version of HRM emphasizes that people are important resourcesthrough which organizations achieve competitive advantage. These resources havetherefore to be acquired, developed and deployed in ways that will benefit the orga-nization. The focus is on the quantitative, calculative and business-strategic aspects of

Human resource management 11

managing human resources in as rational a way as for any other economic factor. AsGuest (1999a) comments:

The drive to adopt HRM is... based on the business case of a need to respond to anexternal threat from increasing competition. It is a philosophy that appeals to manage-ments who are striving to increase competitive advantage and appreciate that to do thisthey must invest in human resources as well as new technology.

He also commented that HRM reflects a long-standing capitalist tradition in whichthe worker is regarded as a commodity. The emphasis is therefore on the interests ofmanagement, integration with business strategy, obtaining added value from peopleby the processes of human resource development and performance management andthe need for a strong corporate culture expressed in mission and value statementsand reinforced by communications, training and performance managementprocesses.

The soft version of HRM traces its roots to the human-relations school; it empha-sizes communication, motivation and leadership. As described by Storey (1989) itinvolves treating employees as valued assets, a source of competitive advantagethrough their commitment, adaptability and high quality (of skills, performance andso on). It therefore views employees, in the words of Guest (1999a), as means ratherthan objects, but it does not go as far as following Kants advice: Treat people as endsunto themselves rather than as means to an end. The soft approach to HRM stressesthe need to gain the commitment the hearts and minds of employees throughinvolvement, communications and other methods of developing a high-commitment,high-trust organization. Attention is also drawn to the key role of organizationalculture.

In 1998, Legge defined the hard model of HRM as a process emphasizing theclose integration of human resource policies with business strategy which regardsemployees as a resource to be managed in the same rational way as any otherresource being exploited for maximum return. In contrast, the soft version of HRMsees employees as valued assets and as a source of competitive advantage throughtheir commitment, adaptability and high level of skills and performance.

It has, however, been observed by Truss (1999) that even if the rhetoric of HRM issoft, the reality is often hard, with the interests of the organization prevailing overthose of the individual. And research carried out by Gratton et al (1999) found that inthe eight organizations they studied, a mixture of hard and soft HRM approaches wasidentified. This suggested to the researchers that the distinction between hard andsoft HRM was not as precise as some commentators have implied.

12 Managing people

The strategic nature of HRMPerhaps the most significant feature of HRM is the importance attached to strategicintegration, which flows from top managements vision and leadership, and whichrequires the full commitment of people to it. Guest (1987, 1989a, 1989b, 1991) believesthat this is a key policy goal for HRM, which is concerned with the ability of the orga-nization to integrate HRM issues into its strategic plans, to ensure that the variousaspects of HRM cohere, and to encourage line managers to incorporate an HRMperspective into their decision-making.

Legge (1989) considers that one of the common themes of the typical definitions ofHRM is that human resource policies should be integrated with strategic businessplanning. Sisson (1990) suggests that a feature increasingly associated with HRM is astress on the integration of HR policies both with one another and with business plan-ning more generally.

Storey (1989) suggests that: The concept locates HRM policy formulation firmly atthe strategic level and insists that a characteristic of HRM is its internally coherentapproach.

The commitment-oriented nature of HRMThe importance of commitment and mutuality was emphasized by Walton (1985a) asfollows:

The new HRM model is composed of policies that promote mutuality mutual goals,mutual influence, mutual respect, mutual rewards, and mutual responsibility. The theoryis that policies of mutuality will elicit commitment, which in turn will yield both bettereconomic performance and greater human development.

Guest (1987) wrote that one of the HRM policy goals was the achievement of highcommitment behavioural commitment to pursue agreed goals, and attitudinalcommitment reflected in a strong identification with the enterprise.

It was noted by Legge (1995) that human resources may be tapped most effectivelyby mutually consistent policies that promote commitment and which, as a conse-quence, foster a willingness in employees to act flexibly in the interests of the adap-tive organizations pursuit of excellence.

But this emphasis on commitment has been criticized from the earliest days ofHRM. Guest (1987) asked: commitment to what? and Fowler (1987) has stated:

At the heart of the concept is the complete identification of employees with the aims andvalues of the business employee involvement but on the companys terms. Power in

Human resource management 13

the HRM system remains very firmly in the hands of the employer. Is it really possible toclaim full mutuality when at the end of the day the employer can decide unilaterally toclose the company or sell it to someone else?

People as human capitalThe notion that people should be regarded as assets rather than variable costs, inother words, treated as human capital, was originally advanced by Beer et al (1984).HRM philosophy, as mentioned by Karen Legge (1995), holds that human resourcesare valuable and a source of competitive advantage. Armstrong and Baron (2002)stated that:

People and their collective skills, abilities and experience, coupled with their ability todeploy these in the interests of the employing organization, are now recognized asmaking a significant contribution to organizational success and as constituting a signifi-cant source of competitive advantage.

Unitary philosophyThe HRM approach to employee relations is basically unitary it is believed thatemployees share the same interests as employers. This contrasts with what could beregarded as the more realistic pluralist view, which says that all organizations containa number of interest groups and that the interests of employers and employees do notnecessarily coincide.

IndividualisticHRM is individualistic in that it emphasizes the importance of maintaining linksbetween the organization and individual employees in preference to operatingthrough group and representative systems.

HRM as a management-driven activityHRM can be described as a central, senior management-driven strategic activity thatis developed, owned and delivered by management as a whole to promote the inter-ests of the organization that they serve. Purcell (1993) thinks that the adoption ofHRM is both a product of and a cause of a significant concentration of power in thehands of management, while the widespread use of the language of HRM, if not itspractice, is a combination of its intuitive appeal to managers and, more importantly, aresponse to the turbulence of product and financial markets. He asserts that HRM isabout the rediscovery of management prerogative. He considers that HRM policies

14 Managing people

and practices, when applied within a firm as a break from the past, are often associ-ated with words such as commitment, competence, empowerment, flexibility,culture, performance, assessment, reward, teamwork, involvement, cooperation,harmonization, quality and learning. But the danger of descriptions of HRM asmodern best-management practice is that they stereotype the past and idealize thefuture.

Sisson (1990) suggested that: The locus of responsibility for personnel manage-ment no longer resides with (or is relegated to) specialist managers. More recently,Purcell et al (2003) underlined the importance of line management commitment andcapability as the means by which HR policies are brought to life.

Focus on business valuesThe concept of HRM is largely based on a management and business-oriented philos-ophy. It is concerned with the total interests of the organization the interests of themembers of the organization are recognized but subordinated to those of the enter-prise. Hence the importance attached to strategic integration and strong cultures,which flow from top managements vision and leadership, and which require peoplewho will be committed to the strategy, who will be adaptable to change, and who willfit the culture. By implication, as Guest (1991) says: HRM is too important to be left topersonnel managers.

In 1995 Legge noted that HRM policies are adapted to drive business values andare modified in the light of changing business objectives and conditions. Shedescribes this process as thinking pragmatism and suggests that evidence indicatesmore support for the hard versions of HRM than the soft version.

RESERVATIONS ABOUT HRM

For some time HRM was a controversial topic, especially in academic circles. Themain reservations have been that HRM promises more than it delivers and that itsmorality is suspect.

HRM promises more than it can deliverNoon (1992) has commented that HRM has serious deficiencies as a theory:

It is built with concepts and propositions, but the associated variables and hypothesesare not made explicit. It is too comprehensive If HRM is labelled a theory it raisesexpectations about its ability to describe and predict.

Human resource management 15

Guest (1991) believes that HRM is an optimistic but ambiguous concept; it is allhype and hope.

Mabey et al (1998) follow this up by asserting that the heralded outcomes (of HRM)are almost without exception unrealistically high. To put the concept of HRM intopractice involves strategic integration, developing a coherent and consistent set ofemployment policies, and gaining commitment. This requires high levels of determi-nation and competence at all levels of management and a strong and effective HRfunction staffed by business-oriented people. It may be difficult to meet these criteria,especially when the proposed HRM culture conflicts with the established corporateculture and traditional managerial attitudes and behaviour.

Gratton et al (1999) are convinced on the basis of their research that there is:

a disjunction between rhetoric and reality in the area of human resource managementbetween HRM theory and HRM practice, between what the HR function says it is doingand that practice as perceived by employers, and between what senior managementbelieves to be the role of the HR function, and the role it actually plays.

In their conclusions they refer to the hyperbole and rhetoric of human resourcemanagement.

Caldwell (2004) believes that HRM is an unfinished project informed by a self-fulfilling vision of what it should be.

In response to the above comments it is agreed that many organizations that thinkthey are practising HRM are doing nothing of the kind. It is difficult, and it is best notto expect too much. Most of the managements who hurriedly adopted performance-related pay as an HRM device that would act as a lever for change have been sorelydisappointed.

But the research conducted by Guest and Conway (1997) covering a stratifiedrandom sample of 1,000 workers established that a notably high level of HRM wasfound to be in place. This contradicts the view that management has tended to talkup the adoption of HRM practices. The HRM characteristics covered by the surveyincluded the opportunity to express grievances and raise personal concerns on suchmatters as opportunities for training and development, communications about busi-ness issues, single status, effective systems for dealing with bullying and harassmentat work, making jobs interesting and varied, promotion from within, involvementprogrammes, no compulsory redundancies, performance-related pay, profit sharingand the use of attitude surveys.

The morality of HRMHRM is accused by many academics of being manipulative if not positively immoral.

16 Managing people

Willmott (1993) remarks that HRM operates as a form of insidious control by compli-ance when it emphasizes the need for employees to be committed to do what theorganization wants them to do. It preaches mutuality but the reality is that behind therhetoric it exploits workers. It is, they say, a wolf in sheeps clothing (Keenoy, 1990a).As Legge (1998) pointed out:

Sadly, in a world of intensified competition and scarce resources, it seems inevitablethat, as employees are used as means to an end, there will be some who will lose out.They may even be in the majority. For these people, the soft version of HRM may be anirrelevancy, while the hard version is likely to be an uncomfortable experience.

The accusation that HRM treats employees as means to an end is often made.However, it could be argued that if organizations exist to achieve ends, which theyobviously do, and if those ends can only be achieved through people, which is clearlythe case, the concern of managements for commitment and performance from thosepeople is not unnatural and is not attributable to the concept of HRM it existed inthe good old days of personnel management before HRM was invented. Whatmatters is how managements treat people as ends and what managements provide inreturn.

Much of the hostility to HRM expressed by a number of academics is based on thebelief that it is hostile to the interests of workers, ie that it is managerialist. However,the Guest and Conway (1997) research established that the reports of workers onoutcomes showed that a higher number of HR practices were associated with higherratings of fairness, trust and managements delivery of their promises. Those experi-encing more HR activities also felt more secure in and more satisfied with their jobs.Motivation was significantly higher for those working in organizations where moreHR practices were in place. In summary, as commented by Guest (1999b), it appearsthat workers like their experience of HRM. These findings appear to contradict theradical critique view produced by academics such as Mabey et al (1998) that HRMhas been ineffectual, pernicious (ie managerialist) or both. Some of those who adoptthis stance tend to dismiss favourable reports from workers about HRM on thegrounds that they have been brainwashed by management. But there is no evidenceto support this view. Moreover, as Armstrong (2000a) pointed out:

HRM cannot be blamed or given credit for changes that were taking place anyway. Forexample, it is often alleged to have inspired a move from pluralism to unitarism in indus-trial relations. But newspaper production was moved from Fleet Street to Wapping byMurdoch, not because he had read a book about HRM but as a means of breaking theprint unions control.

Human resource management 17

Contradictions in the reservations about HRMGuest (1999a) has suggested that there are two contradictory concerns about HRM.The first as formulated by Legge (1995, 1998) is that while management rhetoric mayexpress concern for workers, the reality is harsher. Keenoy (1997) complains that: Thereal puzzle about HRMism is how, in the face of such apparently overwhelming crit-ical refutation, it has secured such influence and institutional presence.

Other writers, however, simply claim that HRM does not work. Scott (1994) forexample, finds that both management and workers are captives of their history andfind it very difficult to let go of their traditional adversarial orientations. But thesecontentions are contradictory. Guest (1999b) remarks that, It is difficult to treat HRMas a major threat (though what it is a threat to is not always made explicit) deservingof serious critical analysis while at the same time claiming that it is not practiced or isineffective.

HRM AND PERSONNEL MANAGEMENT

A debate about the differences, if any, between HRM and personnel managementwent on for some time. It has died down recently, especially as the terms HRM andHR are now in general use both in their own right and as synonyms for personnelmanagement. But understanding of the concept of HRM is enhanced by analysingwhat the differences are and how traditional approaches to personnel managementhave evolved to become the present day practices of HRM.

Some commentators (Hope-Hailey et al, 1998; Keenoy, 1990b; Legge, 1989, 1995;Sisson, 1990; Storey, 1993) have highlighted the revolutionary nature of HRM. Othershave denied that there is any significant difference in the concepts of personnelmanagement and HRM. Torrington (1989) suggested that: Personnel managementhas grown through assimilating a number of additional emphases to produce an evenricher combination of experience HRM is no revolution but a further dimension toa multi-faceted role.

The conclusion based on interviews with HR and personnel directors reached byGennard and Kelly (1994) on this issue was that it is six of one and half a dozen of theother and it is a sterile debate. An earlier answer to this question was made byArmstrong (1987):

HRM is regarded by some personnel managers as just a set of initials or old wine in newbottles. It could indeed be no more and no less than another name for personnelmanagement, but as usually perceived, at least it has the virtue of emphasizing the virtueof treating people as a key resource, the management of which is the direct concern of

18 Managing people

top management as part of the strategic planning processes of the enterprise. Althoughthere is nothing new in the idea, insufficient attention has been paid to it in many orga-nizations.

The similarities and differences between HRM and personnel management aresummarized in Table 1.1.

Human resource management 19

Similarities Differences

1. Personnel management strategies, like 1. HRM places more emphasis on strategicHRM strategies, flow from the business fit and integration.strategy. 2. HRM is based on a management and

2. Personnel management, like HRM, business orientated philosophy.recognizes that line managers are 3. HRM attaches more importance to theresponsible for managing people. The management of culture and thepersonnel function provides the necessary achievement of commitment (mutuality).advice and support services to enable 4. HRM places greater emphasis on themanagers to carry out their responsibilities. role of line managers as the implementers

3. The values of personnel management and of HR policies.at least the soft version of HRM are 5. HRM is a holistic approach concernedidentical with regard to respect for the with the total interests of the business individual, balancing organizational and the interests of the members of theindividual needs, and developing people organization are recognized butto achieve their maximum level of subordinated to those of the enterprise.competence both for their own satisfaction 6. HR specialists are expected to be businessand to facilitate the achievement of partners rather than personnelorganizational objectives. administrators.

4. Both personnel management and HRM 7. HRM treats employees as assets not costs.recognize that one of their most essentialfunctions is that of matching people toever-changing organizationalrequirements placing and developing theright people in and for the right jobs.

5. The same range of selection, competenceanalysis, performance management,training, management development andreward management techniques are usedboth in HRM and personnel management.

6. Personnel management, like the softversion of HRM, attaches importance tothe processes of communication andparticipation within an employeerelations system.

Table 1.1 Similarities and differences between HRM and personnel management

The differences between personnel management and human resource managementappear to be substantial but they can be seen as a matter of emphasis and approachrather than one of substance. Or, as Hendry and Pettigrew (1990) put it, HRM can beperceived as a perspective on personnel management and not personnel manage-ment itself.

HOW HR IMPACTS ON ORGANIZATIONALPERFORMANCE

The assumption underpinning the practice of HRM is that people are the organiza-tions key resource and organizational performance largely depends on them. If,therefore, an appropriate range of HR policies and processes are developed andimplemented effectively, then HR will make a substantial impact on firm perfor-mance.

The Holy Grail sought by many commentators on human resource management isto establish that a clear positive link between HRM practices and organizational per-formance exists. There has been much research, as summarized in Table 1.2, over thelast decade or so that has attempted to answer two basic questions: Do HR practicesmake a positive impact on organizational performance? If so, how is the impactachieved? The second question is the most important one. It is not enough to justifyHRM by proving that it is a good thing. What counts is what can be done to ensurethat it is a good thing. This is the black box mentioned by Purcell et al (2003) that liesbetween intentions and outcomes.

Ulrich (1997a) has pointed out that: HR practices seem to matter; logic says it is so;survey findings confirm it. Direct relationships between investment and attention toHR practices are often fuzzy, however, and vary according to the population sampledand the measures used.

Purcell et al (2003) have cast doubts on the validity of some of the attempts throughresearch to make the connection:

Our study has demonstrated convincingly that research which only asks about thenumber and extent of HR practices can never be sufficient to understand the linkbetween HR practices and business performance. As we have discussed it is misleadingto assume that simply because HR policies are present that they will be implemented asintended.

Further comments about attempts to trace the link have been made by Truss (2001)who, following research in Hewlett-Packard, remarked that:

20 Managing people

Our findings did lend strong support to the argument put forward by Mueller (1996) thatthe informal organization has a key role to play in the HRM process such that informalpractice and norms of behaviour interact with formal HR policies... We cannot considerhow HRM and performance are linked without analysing, in some detail, how policy isturned into practice through the lens of the informal organization.

Research outcomesA considerable amount of research has been carried out to establish the link betweenHRM and firm performance. The outcomes of some of the main projects are summa-rized in Table 1.2.

Human resource management 21

Researcher(s) Methodology Outcomes

Arthur (1990, Data from 30 US strip mills used to Firms with a high commitment1992, 1994) assess impact on labour efficiency strategy had significantly higher

and scrap rate by reference to the levels of both productivity andexistence of either a high quality than those with acommitment strategy* or a control strategy.control strategy*.

Huselid (1995) Analysis of the responses of 968 US Productivity is influenced byfirms to a questionnaire exploring employee motivation; financialthe use of high performance work performance is influenced bypractices*, the development of employee skills, motivation andsynergies between them and the organizational structures.alignment of these practices withthe competitive strategy.

Huselid and An index of HR systems in 740 Firms with high values on theBecker (1996) firms was created to indicate the index had economically and

degree to which each firm adopted statistically higher levels ofa high performance work system. performance.

Becker et al Outcomes of a number of research High performance systems make(1997) projects were analysed to assess the an impact as long as they are

strategic impact on shareholder embedded in the managementvalue of high performance work infrastructure.systems.

Table 1.2 Outcomes of research on the link between HR and organizational perfor-mance

22 Managing people

Patterson et al The research examined the link HR practices explained significant(1997) between business performance and variations in profitability and

organization culture and the use of productivity (19% and 18%a number of HR practices. respectively). Two HR practices

were particularly significant: (1) theacquisition and development ofemployee skills and (2) job designincluding flexibility, responsibility,variety and the use of formal teams.

Thompson (1998) A study of the impact of high The number of HR practices andperformance work practices such as the proportion of the workforceteamworking, appraisal, job rotation, covered appeared to be the keybroad-banded grade structures and differentiating factor between moresharing of business information in and less successful firms.623 UK aerospace establishments.

The 1998 An analysis of the survey which A strong assocation exists betweenWorkplace sampled some 2,000 workplaces HRM and both employeeEmployee and obtained the views of about attitudes and workplaceRelations Survey 28,000 employees. performance.(as analysed byGuest et al2000a)

The Future of 835 private sector organizations A greater use of HR practices isWork Survey, were surveyed and interviews were associated with higher levels ofGuest et al carried out with 610 HR employee commitment and(2000b) professionals and 462 chief contribution and is in turn linked

executives. to higher levels of productivityand quality of services.

Purcell et al A University of Bath longitudinal The most successful companies had(2003) study of 12 companies to establish what the researchers called the big

how people management impacts on idea. The companies had a clearorganizational performance. vision and a set of integrated values

which were embedded, enduring,collective, measured and managed.They were concerned with sustaining performance andflexibility. Clear evidence existedbetween positive attitudes towardsHR policies and practices, levels ofsatisfaction, motivation and

Table 1.2 continued

continued

How HR makes an impactIn Guest et al (2000b) the relationship between HRM and performance was modelledas shown in Figure 1.4.

Human resource management 23

commitment, and operationalperformance. Policy and practiceimplementation (not the numberof HR practices adopted) is thevital ingredient in linking peoplemanagement to business performance and this is primarilythe task of line managers.

* In the US research projects set out in Table 1.2 reference is made to the impact made by the followingstrategies: A commitment strategy a strategy, as described by Walton (1985b) which promotes mutualitybetween employers and employees. A control strategy as described by Walton (1985b), one in which theaim is to establish order, exercise control and achieve efficiency in the application of the workforce butwhere employees did not have a voice except through their unions. High performance work systems theseaim to impact on performance through its people by the use of such practices as rigorous recruitment andselection procedures, extensive and relevant training and management development activities, incentivepay systems and performance management processes.

Table 1.2 continued

Businessstrategy

HR strategy

Quality ofgoods andservices

Productivity

HR effectiveness

FinancialperformanceHR practices

HR outcomesEmployee:

competencecommitment

flexibility

Figure 1.4 Model of the link between HRM and performance (Source: Guest et al,2000b)

The messages from research, especially that carried out by Purcell et al (2003), are thatHR can make an impact by leading or contributing to:

the development and successful implementation of high performance work prac-tices, particularly those concerned with job and work design, flexible working,resourcing (recruitment and selection and talent management), employee devel-opment (increasing skills and extending the skills base), reward, and givingemployees a voice;

the formulation and embedding of a clear vision and set of values (the big idea); the development of a positive psychological contract and means of increasing the

motivation and commitment of employees; the formulation and implementation of policies which, in the words of Purcell et al

(2003) meet the needs of individuals and create a great place to work; the provision of support and advice to line managers on their role in imple-

menting HR policies and practices; the effective management of change.

HRM IN CONTEXT

HRM processes take place within the context of the internal and external environ-ment of the organization. They will be largely contingent on the environmentalfactors that affect them.

Contingency theoryContingency theory tells us that definitions of aims, policies and strategies, lists ofactivities, and analyses of the role of the HR department are valid only if they arerelated to the circumstances of the organization. Descriptions in books such as thiscan only be generalizations that suggest approaches and provide guidelines foraction; they cannot be prescriptive in the sense of laying down what should be done.Contingency theory is essentially about the need to achieve fit between what theorganization is and wants to become (its strategy, culture, goals, technology, thepeople it employs and its external environment) and what the organization does(how it is structured, and the processes, procedures and practices it puts into effect).

Contextual factorsThere are three main contextual factors that influence HR policies and practices.

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1. Technology

The technology of the business exerts a major influence on the internal environment how work is organized, managed and carried out. The introduction of new tech-nology may result in considerable changes to systems and processes. Different skillsare required and new methods of working are developed. The result may be an exten-sion of the skills base of the organization and its employees, including multiskilling(ensuring that people have a range of skills that enable them to work flexibly on avariety of tasks, often within a teamworking environment). But it could result in de-skilling and a reduction in the number of jobs (downsizing).

New technology can therefore present a considerable threat to employees. Theworld of work has changed in many ways. Knowledge workers are employed inlargely computerized offices and laboratories, and technicians work in computerintegrated manufacturing systems. They may have to be managed differently fromthe clerks or machine operators they displace. The service industries have becomepredominant and manufacturing is in decline. New work environments such as callcentres have become common and tele-working (working from home with a net-worked computer) is increasing.

2. Competitive pressures

Global competition in mature production and service sectors is increasing. This isassisted by easily transferable technology and reductions in international tradebarriers. Customers are demanding more as new standards are reached throughinternational competition. Organizations are reacting to this competition by becom-ing customer-focused, speeding up response times, emphasizing quality and contin-uous improvement, accelerating the introduction of new technology, operating moreflexibly and losing cost.

The pressure has been for businesses to become lean organizations, downsizingand cutting out layers of management and supervision. They are reducing permanentstaff to a core of essential workers, increasing the use of peripheral workers (sub-contractors, temporary staff) and outsourcing work to external service providers.The aim is to reduce employment costs and enable the enterprise easily to increase orreduce the numbers available for work in response to fluctuations in the level ofbusiness activity. They become the so-called flexible firms. The ultimate develop-ment of this process is the virtual firm or corporation, where through the exten-sive use of information technology a high proportion of marketing and professionalstaff mainly work from home, only coming into the office on special occasionsto occupy their hot desks, and spending more time with their customers orclients.

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Another response to competitive pressures is business process re-engineering(BPR), which examines the process that contains and links those functions togetherfrom initiation to completion. It looks at processes in organizations horizontally toestablish how they can be integrated more effectively as well as streamlined. It cantherefore form the basis for an organizational redesign exercise. From an HR point ofview, the outcome of a BPR exercise may well be the need to attract or develop peoplewith new skills as well as pressure for the improvement of team working. It alsoemphasizes the importance of an integrated a coherent approach to the develop-ment and implementation of HR policies and employment practices. Re-engineeringoften promises more than it achieves and is not regarded as highly as it once was, notleast because it often neglected the human aspects, giving insufficient attention to themanagement of change and retraining staff.

3. Responses affecting people

The responses to the increased use of technology and to economic and competitivepressures have changed the nature of people management in a number of ways.These include slimmer and flatter organization structures in which cross-functionaloperations and teamworking have become more important, more flexible workingpatterns, total quality and lean production initiatives, and the decentralization anddevolvement of decision-making.

The challenge to HRMUlrich (1998) suggests that environmental and contextual changes present a numberof competitive challenges to organizations that mean that HR has to be involved inhelping to build new capabilities. These comprise:

Globalization, which requires organizations to move people, ideas, products andinformation around the world to meet local needs. New and important ingredi-ents must be added to the mix when making strategy: volatile political situations,contentious global trade issues, fluctuating exchange rates and unfamiliarcultures.

Profitability through growth the drive for revenue growth means that companiesmust be creative and innovative and this means encouraging the free flow ofinformation and shared learning among employees.

Technology the challenge is to make technology a viable, productive part of thework setting.

Intellectual capital this is the source of competitive advantage for organizations.The challenge is to ensure that firms have the capability to find, assimilate,

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compensate and retain human capital in the shape of the talented individualsthey need who can drive a global organization that is both responsive to itscustomers and the burgeoning opportunities of technology. They have also toconsider how the social capital of the organization the ways in which peopleinteract can be developed. Importantly, organizations have to focus on organi-zational capital the knowledge they own and how it should be managed.

Change, change and more change the greatest challenge companies face isadjusting to indeed, embracing non-stop change. They must be able to learnrapidly and continuously, and take on new strategic imperatives faster and morecomfortably.

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Human capital management

Human capital management (HCM) has been described as a paradigm shift fromthe traditional approach to human resource management (Kearns, 2005b) a largeclaim. It is considered in this chapter initially by defining the concept of humancapital management and its relationship to the concept of human resource manage-ment. To understand HCM it is necessary to know about the concept of humancapital, which is the next section heading. The chapter is completed with an analysisof the processes involved in HCM including a discussion of human capital measure-ment and reporting.

HUMAN CAPITAL MANAGEMENT DEFINED

Human capital management (HCM) is concerned with obtaining, analysing andreporting on data that informs the direction of value-adding people management,strategic investment and operational decisions at corporate level and at the level offront line management. The defining characteristic of HCM is this use of metrics toguide an approach to managing people that regards them as assets and emphasizesthat competitive advantage is achieved by strategic investments in those assetsthrough employee engagement and retention, talent management and learning anddevelopment programmes.

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The Accounting for People Task Force Report (2003) stated that HCM involvesthe systematic analysis, measurement and evaluation of how people policies andpractices create value. The report defined HCM as an approach to people manage-ment that treats it as a high level strategic issue rather than an operational matter tobe left to the HR people . The Task Force expressed the view that HCM hasbeen under-exploited as a way of gaining competitive edge. As John Sunderland,Task Force member and Executive Chairman of Cadbury Schweppes plc commented:An organizations success is the product of its peoples competence. That linkbetween people and performance should be made visible and available to all stake-holders.

Nalbantian et al (2004) emphasize the measurement aspect of HCM. They definehuman capital as, The stock of accumulated knowledge, skills, experience, creativityand other relevant workforce attributes and suggest that human capital managementinvolves putting into place the metrics to measure the value of these attributes andusing that knowledge to effectively manage the organization. HCM is defined byKearns (2005b) as The total development of human potential expressed as organiza-tional value. He believes that HCM is about creating value through people and thatit is a people development philosophy, but the only development that meansanything is that which is translated into value.

HUMAN CAPITAL MANAGEMENT AND HUMANRESOURCE MANAGEMENT

In the opinion of Mayo (2001) the essential difference between HCM and HRM is thatthe former treats people as assets while the latter treats them as costs. Kearns (2005b)believes that in HCM people are value adders, not overheads while in HRM peopleare (treated as) a significant cost and should be managed accordingly. According toKearns, in HRM the HR team is se