EFFECT OF HUMAN CAPITAL DEVELOPMENT ON ORGANIZATIONAL PERFORMANCE
CHAPTER TWO
REVIEW OF LITERATURE
INTRODUCTION
Our focus in this chapter is to critically examine relevant literatures that would assist in explaining the research problem and furthermore recognize the efforts of scholars who had previously contributed immensely to similar research. The chapter intends to deepen the understanding of the study and close the perceived gaps.
Precisely, the chapter will be considered in three sub-headings:
- Conceptual Framework
- Theoretical Framework
- Empirical Review and
2.1 CONCEPTUAL FRAMEWORK
Human Capital
Becker (1964) sees human resource as the stock of knowledge, skills and abilities embedded in an individual that results from natural endowment and subsequent investment in education, training and experience. Parnes (1984) views it as the abilities and know-how of men and women that have been acquired at some cost and that can command a price in the labor market because they are useful in the productive process.
Seligman et al. (1997: 3) opines that any quality specific to and un-detachable from a person that allows her (or him) to perform economic tasks more efficiently, vigorously, or consistently – or allows her (him) to lead a happier life. Galunic and Anderson (2000: 3) Know-how, information, relationships, and general relationships, and general capabilities that individuals bring to bear on behalf of the firm through the employment relation.
Rastogi (2000: 196) defines human capital as highly skilled, creative, motivated, collaborative and knowledgeable people who understand the dynamic business environmental context, and the competitive logic of their enterprises; and the critical requirements thereof.
Mayo (2001) A capability, knowledge, skill, experience, and networking, with the ability to achieve results and the potential for growth; individual motivation in the form of aspirations, ambition, drives, work motivations and productivity; work group effectiveness in the form of
supportiveness, mutual respect sharing and value; leadership in the form of clarity of vision and ability to communicate that vision; organizational climate in the form of culture particularly the freedom to innovate, openness, flexibility and respect for the individual.
Gratton and Ghoshal (2003) The composite of an individual’s intellectual, social and emotional capitals by which it is suggested that “volunteer” employees need to align their personal values with work to reflect the most satisfying passions on a human aspiration, thereby continuously improving on one’s own knowledge, relationship and sense of self-efficacy. Weatherly (2003: 1) The collective sum of the attributes, life experience, knowledge, inventiveness, energy and enthusiasm that its people choose to invest in their work.Through these definitions there is a clear emphasis on human capital as the knowledge, skills and abilities of individuals (Youndt et al., 2004), and the author takes this as the definition of the concept for the present study.
Despite the proliferation of human capital definitions in the literature, a number of key elements seem to be common, encompassing knowledge, experience, trained skills, endowed abilities, attitudes and behaviour (Davenport, 1999). In support of this view, Snell and Dean (1992) propose three attributes of human capital components. First, skills and knowledge characterize capital because of their ability to enhance productivity. Second, human capital is developed through a firm’s deliberate investment on either hiring capable people on the market or providing them with internal training. Third, human capital may somehow influence a labour market price because it is valuable to firms and, more importantly, transferable to other organizations. Notably, these proposed attributes of human capital mainly involve people’s knowledge, skills and abilities that are of economic value to the firm. Therefore, it can be viewed that firm investments to increase them through, for instance, training initiatives tend to be determined by future returns to the firm in the form of increased productivity (Youndt et al., 1996).
Human Capital Management (Hcm) Features And Functions
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Incentive and Compensation Management
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The Emergence Of Human Capital Theory
The importance of understanding the motivations and social needs of individuals at work and how this can potentially increase production and improve the process of management is the major contribution of the human relations movement (Roethlisberger and Dickson, 1939). Work in the neo-human relations tradition also places an emphasis on the psychological and social factors that can lead employees to perform highly, from Maslow’s emphasis on human needs (Maslow, 1943), Herzberg’s postulation of two sets of factors – hygiene and growth – in his theory of motivation and satisfaction (Herzberg et al., 1959), McGregor’s Theory X and Theory Y (McGregor, 1987), and Argyris’s focus on the effects of the formal organization on individual development within the organization (Argyris, 1960). The evolution of human capital theory is firmly located within this tradition, and can be divided conceptually into two broad approaches: macro and micro. The macro strand essentially reflects the economic view on human capital, whereas the micro perspective focuses on the impact of human capital development at the organizational level.
Macro orientation: Economic perspectives
The origin of human capital theory stems from economists’ interest in incorporating human capital into economic growth equations (Chuang, 1999 and Nordhaug, 1993). Most of the human capital articles feature macroeconomic perspectives, ranging from national education to the labor market. Theodore W. Schultz and Gary S. Becker, Nobel Prize Laureates for Economic Science in 1969 and 1992, respectively, develop the theories of human capital in terms of growth and development. Schultz’s work concentrates on education as a key to raising productivity, and lead to the modern emphasis on human capital as a factor in production. As Schultz (1971: 54) argues: “education is one of the major sources for economic growth after adjusting for differences in innate abilities and associated characteristics that affect individual earnings.” His research contribution, in fact, paves the way for Becker’s more elaborated analyses of human skills as a source of productivity growth, applicable to innovations in labor economics (Becker, 1976).
The starting point of Becker’s human capital theory lies in both schooling and on-the-job training, which aim to enhance workers’ natural abilities and to increase their individual productive capacity over time (Josefek and Kauffman, 1998). Also, it is based on the idea that the economic well-being from investments in both general and firm-specific human capital (Galunic and Anderson, 2000; Lazear, 1998; Becker, 1964) outweighs the economic value of the physical capital in the long run. To elaborate these views, Nerdrum and Erikson (2001) and Galunic and Anderson (2000) assert that general human capital is acquired through schooling and experience on the job which adds value to the individuals and affects their earnings differences. However, it is argued that their general human capital is normally deployable across the same jobs at other firms to produce relatively similar benefits (Finegold et al., 2002).
In other words, employees who invest in education to leverage their skill level can justify higher earnings as a result of their investment in different organizations. As Schultz (1971: 36) states: “While any capability produced by human investment becomes a part of the human agent and hence cannot be sold, it is nevertheless in touch with the marketplace by affecting the wages and salaries the human agent can earn. The resulting increase in earnings is the yield on the investment.” On the other hand, specific human capital is acquired through formal and informal on-the job training. This includes firm-specific and job-specific skills that enable people to perform more productively at a firm providing training than at a firm that does not. Trained workers are normally paid a premium for specific skills, which is higher than they might be worth to another firm (Galunic and Anderson, 2000). The reason is that they are tied to organizational politics, corporate culture, communication channels, customer needs of a firm and interpersonal networks within a particular organizational context (Nordhaug, 1998). Specific skills are not easily transferable across firms. Therefore, specifically trained workers seem to accumulate more bargaining power than those with general skills (Green & Montgomery, 1998). From these arguments, a major issue within organizations becomes: how do firms invest in human capital development of current employees at rates required to keep them employable? As human capital grows in significance, how can employers capitalize on individuals’ potential?
Micro orientation: Organizational perspectives
Early writings have focused on the economic value of human capital which leads to a high propensity for firms to adopt it ( Mayo, 2001; Oliver, 2001; Daly, 1998; Pfeffer, 1994). Since the rate of return on investment in human capital exceeds that of return on investment in physical capital (Bassi et al., 2000), some strategic management researchers have turned their attention to the theme of this “invisible and strategic asset” (Hall, 1993; Itami and Roehl, 1987) with a particular emphasis on the idea of competency, as put forth by Fiol (2001), Manfield (1996) and Hooghiemstra (1994). In a sense, competency is defined as “individuals’ knowledge, skills, abilities and other characteristics that differentiate high from average performance.” (Mirable, 1997: 75) This definition of competency seems to resonate with the definition of human capital suggested by Youndt et al. (2004).
Rastogi (2000) proposes that, in order to develop human capital, a firm needs to employ the competency-based framework of HR generic functions: selection, appraisal, promotion and compensation (Marchington and Grugulis, 2000; Schuler and Jackson, 1999; Yeung et al., 1994; Tichy et al., 1982). Previous studies have been based on the notion that applications of the HR competency can create competitiveness of organizations (Ulrich, 1997; Burgoyne, 1993; Prahalad and Hamel, 1990). While some commentators argue that the HR competency itself can be considered a source of competitive advantage (Yeung et al., 1996), others provide alternative views that people’s shared identity (Foil, 1991; Albert and Whetten, 1985) and shared knowledge (Sveiby, 2001; Nonaka et al., 2000) contribute to a firm’s competitive advantage. As theories of strategic management have turned inward toward resource-based view of the firm, where competitive advantage increasingly resides in a firm’s ability to learn and change through people, the human competency becomes increasingly important to generate positive performance (Barney and Wright, 1998).
Human capital and the resource-based view theory
Within the strategy literature, the issue of what contributes to competitive advantage has seen a shift in emphasis away from a focus on the external positioning in the industry toward an acknowledgement that internal resources be seen crucial to sustained competitiveness (Bartlett and Ghoshal, 2002; Wright et al., 2001; Olalla, 1999). The work of Penrose (1959) represents the beginning of the resource-based view of the firm, later articulated by Rumelt (1984), Dierickx and Cool (1989) and Barney (1995, 1991). The RBV is found on the assumption that individual organizations build a valuable set of resources, both tangible and intangible, and bundle them together in unique ways to generate economic rent (Foss, 1996; Castanias and Helfat, 1991; Conner, 1991; Wernerfelt, 1984). In other words, it is argued that competitive advantage is no longer dependent, as traditionally assumed, on such bases as external resources and technology, since these are increasingly easy to imitate (Black and Boal, 1994). Rather, competitive advantage is, according to the RBV, dependent on the extent to which a firm optimizes resource endowments and deployments within an organization (Prahalad and Hamel, 1994; Reed and DeFillipi, 1990). In order to be considered a source of competitive advantage, resources must meet four criteria: value, rarity, inimitability and non-substitutability (Priem and Butler, 2001; Wright and McMahan, 1992; Grant, 1991). Building on this theoretical perspective of the RBV, De Saá-Pérez and García-Falcón (2002) and Wright et al. (1994) argue that human resources also meet the RBV conditions for being a source of competitive advantage, as outlined below.
Value: Regarding value creation through human resources, Boxall (1996) points out that the interplay between inner core employees (i.e., managers, strategists, technical specialists) and outer core employees (i.e., committed employees with appropriate industrial skills) is critical to a firm’s success. The adaptive capacity from the inner core employees and the operational capacity from the outer core employees must be orchestrated to generate value: “All firms must build and defend a satisfactory inner and outer core to secure viability with acceptable profit performance in any environment subject to alternating periods of crisis [when the adaptive learning of the inner core is critical] and stable growth [when the dependable services and incremental learning of the outer core are critical].” (Boxall, 1996: 268)
Rarity: Human resources are rare because it is difficult to find people who can produce and maintain high performance levels in an organization due to labor market’s heterogeneity (Wright et al., 1994): “If the types and levels of skills are not equally distributed, such that some firms can acquire the talent they need and others cannot, then (ceteris paribus) that form of human capital can be a source of sustained competitive advantage.” (Snell et al., 1996: 65)
Inimitability: This notion emerges from the difficulty in duplicating human resources’ knowledge, abilities, experience and behavior, at least in the short term. There are two main reasons why human resources may be difficult to imitate. The first is cause ambiguity (Lado andWilson, 1994), which arises when it is unclear to identify the precise mechanisms by which HR practices interact to create value. The second is path dependency (Becker and Gerhart, 1996; Barney, 1991); describing how a competing firm is precluded from immediate imitation of HR policies and practices:“First, it is difficult to grasp the precise mechanism by which the interplay of human resource practice and policies generates value…second, these HR systems are path dependent. They consist of policies that are developed over time and cannot be simply purchased in the market by competitors.” (Becker and Gerhart, 1996: 782)
Wright et al. (1994) also argue that unique historical conditions are difficult to imitate because they can determine a firm’s place in time and space to acquire or utilize resources. Also, there may be limits to the management’s ability to reproduce socially complex elements, such as interpersonal relationships, culture and workforce diversity, therefore hard to imitate (Richard, 2001; Amit and Schoemaker, 1993).
Non-substitutability: Human resources are difficult to replace because they possess diverse capacities to adapt to different environments, and those who are able to create value in one context may be unable to do so in others, as asserted by Wright et al. (1994: 312): “…a humanresource must not have substitutes if it is to be the source of a sustained competitive advantage…It is important to note that human resources are one of the few firm resources which have the potential to a) not become obsolete and b) be transferable across a variety of technologies, products and markets.” Given the underlying foundation of HR within the RBV context, Rastogi (2000: 202) argues that human capital (i.e., knowledge, skills and abilities) too constitutes “the ultimate source for sustaining the competitive performance of an organization over time.”
In this sense, Garavan et al. (2001) provide theoretical propositions of strategic human capital accumulation in relation to the RBV principles, with a focus on how firms can manage human resources to achieve competitive advantage . They also commend that the importance of the human capital pool (the collection of employee capabilities), and how it is managed through HR processes, becomes apparent to the strategic aims of the organization. This is supported by the study of Hagan (1996), indicating that an emphasis on human capital chimes with an emphasis in strategy research on core competencies, where economic rents are attributed to “people-embodied skills.” (Hamel and Prahalad, 1994: 232) However, Becker and Gerhart (1996) provide a refined view by arguing that it is not the human capital pool that builds competitive advantage, but the HR systems; a combination of HR policies and practices can create a competitive effect (Barney, 1995). Wright et al. (1994) go so far as to argue that individual knowledge, skills and abilities are essential, but not sufficient, and that employee behavior is required to be aligned with organizational objectives as well.
There are a number of arguments against the RBV perspective in the HR context (Fahy, 2000; Coff, 1997). One important feature of the arguments is the assumption that the RBV is overly focused on internal resources and their influences on the firm’s competitive advantage, while giving little attention to external environments (i.e., labor market). As Kamoche (1996: 215) puts it: “the creation of HR strategic assets depends on the internal organizational processes, the firm’s ability to recruit from the external labor market in the first place and its capacity to prevent the loss and erosion of valued expertise.” This is to oppose the inward-looking perspective of the RBV and to point out the pivotal role of the external environment toward the HR process. Rastogi (2000) simply elaborates this argument by illustrating how an external environment may have an impact on the organization on which human capital serves as a driving force to build competitiveness
Figure 2.1 People as the ultimate resource of an organization
Source: Adapted from Rastogi (2000).
Another argument is that, the knowledge-based view of the firm has emerged (Chatzkel, 2003; Kochan et al., 2002; Sveiby, 2001; Grant, 1996) to make a distinctive contribution to the HR strategy literature (Narasimha, 2000). It goes beyond what the RBV scholars simply view HR systems as resources (Barney, 1991). The knowledge-based view specifically focuses on employees’ capabilities to leverage their knowledge and continuous learning through knowledge acquisition, integration and transfer, in order to collectively accomplish competitive advantage. Wright et al. (2001: 714) state that “knowledge can be viewed as something that characterizes individuals [i.e., human capital], but it can also be shared within groups or networks [i.e., social capital] or institutionalized within organizational processes and databases [organizational capital].” It implies that human resources are not highly valued if they fail to acquire and exploit their knowledge capabilities in the workplace (Kamoche, 1996), and the firm should not merely rely on its HR systems to create competitive advantage. Moreover, studies in the RBV tradition have tended to be rather deterministic, with the assumption that that a written set of HR policies is executed as intended and generates outcomes as expected.
However, Truss (2001) and McGovern et al. (1997) argue that this assumption can be viewed as deterministic, and as failing to account for the individual interpretations. According to their studies, it is found that the written HR policies are not necessarily implemented, due to diverse interpretations of employees toward the HR policies. Truss (2001) therefore suggests that the RBV in relation to human capital needs to be revisited through complex adaptive systems theory, as put forward by Mathews et al.(1999).
Despite critical arguments against the RBV articulated in both HR and strategy literature, the increasing recognition of the RBV has done much to promote human resource management (HRM) in general and human capital development in particular. Also, it has been seen to bring about a convergence between the fields of HRM and strategy (Wright et al., 2001; Cappelli and Crocker-Hefter, 1996).
Human capital and strategic human resource management
The resource-based view of the firm strengthens the often-repeated statement from the field of strategic human resource management (SHRM) - people are highly important assets to the success of the organization ( Boxall, 2003; Boxall and Steeneveld, 1999; Boxall, 1998; Mueller, 1996; Truss and Gratton, 1994). In the SHRM literature, much of the theme as been that to increase human capital within a firm, it is necessary to develop human capital of existing employees and/or attract and retain individuals with desirable skills and knowledge (Youndt et al., 2004; Huang, 2001; Richard and Johnson, 2001). HRM activities are therefore central in developing an organization’s human capital, through such mechanisms as recruitment and selection processes, training programs, appraisals, and rewards packages, by linking them closely to business strategy (Gratton, 2000; Tyson, 1995; Cappelli and Singh, 1992) and performance measures (Tyson, 1997; Dyer and Reeves, 1995; Bailey, 1993). For Human Resource to work effectively, much depends on the commitment on line mangers to carry out human resource activity (Martell and Caroll, 1995). General understanding about the topics of integration and devolvement suggests that an increase in the level of integration of HRM into the corporate strategy should be accompanied by an increase in the level of devolvement of HRM to line managers (Whittaker and Marchington, 2003; Currie and Procter, 2001; Renwick, 2000; Schuler, 1992) Universal, or “best practice” approaches - A major theme in the human resource literature has been the identification of a “best practice” approach, a number of HR practices and systems that would create value within organizations regardless of context and contingencies. It emphasizes the need for strong consistency among HR practices (internal fit) in order to achieve effective performance (Melián-González and Verano-Tacorante, 2004).
The work on high performance work practices (HPWPs) has been characteristic of this approach (Cappelli and Neumark, 2001). This view has a high degree of empirical support (e.g., Delaney and Huselid, 1996; Huselid, 1995; MacDuffie, 1995; Arthur, 1994; Ichniowski et al., 1994). The work of Pfeffer (1994b) has done much to popularize this view. He identifies 15 best practices in HR which becomes seven in his later work (Pfeffer, 1998): employment security, selective hiring, self-managed teams, high compensation contingent on performance, training, reduction of status differentials and sharing information. However, in the work of Rynes et al. (2002), they argue that there are some common misconceptions about HR practices, indicating a gap between research findings and their practical implications.
Arthur (1994, 1992) shows that HR practices focusing on enhancing employee commitment (e.g., decentralized decision-making, comprehensive training, salaried compensation, employee participation), are related to higher organizational performance. Huselid and Becker (1995) argue that HR practices with an emphasis on control, efficiency and the reduction of employee skills and discretion, lead to high turnover and mediocre manufacturing performance. Similarly, Huselid (1995) finds that investments in HR activities such as incentive compensation, selective staffing techniques and employee participation result in lower turnover, greater productivity and increased organizational performance through their impact on employee skill development and motivation. What these studies (e.g., Maruping, 2002; Becker and Huselid, 1997; Huselid, 1995; Huselid and Becker, 1995; Arthur, 1994, 1992) suggest is that the more of the high performance HR practices that are used, the better the performance as indicated by productivity, turnover or financial indicators.
Although support for this view exists, there are notable differences across studies as to what constitutes “best” practices in HR. At their core, most of the studies simply focus on enhancing the skill base of employees through HR activities such as selective staffing, comprehensive training and broad developmental efforts like job rotation and cross utilization (Whitfield, 2000). However, some researchers argue that, in order to establish best practices in HR, the notions of empowerment, participative problem solving and teamwork with job redesign need to be taken into account. While the HPWPs approach has provided an insight into the notion that firms can produce improved performance through their human resources, there are a number of critical views emerging across the studies. They basically argue that specific work practices might improve performance only in the context of other specific practices; it is frequently referred to as the “contingency” model, to be elaborated below.
Contingency, or “fit” approaches - A central tenet of SHRM is that there should be a vertical linkage or integration (Brewster and Larsen, 1992) between HR practices and processes and the organizational strategy of the firm (Gratton, 2000). This raises important issues of how the strategic posture of the organization is likely to influence the style and approach of Human Resource management. As HR strategies vary from firm to firm, a number of researchers have investigated how HR practices vary with differences in a strategic context. Much of the literature in this area rests on traditional strategy typologies, such as cost, flexibility and quality strategies ( Youndt et al., 1996) or Miles & Snow’s (1978) framework of prospector, analyzer and defender (Delery and Doty, 1996).
The emphasis here is on alignment, or fit, between the external environment, the strategy of the organization and HR activity. The notion of fit has been articulated by writers such as Venkatraman (1989) and the benefits of tight coupling to ensure efficiency and effectiveness in achieving organizational aims have been well attested. But some scholars ( Gerhart et al., 1996; Orton and Weick, 1990; Perrow, 1984) have argued that such tight links may represent a barrier to adaptability and flexibility. An influential way of looking at human resources and issues of contingency has been to look through the lens of soft and hard models ( Guest, 1995; Legge, 1995; Storey, 1995; Sisson, 1994). The “soft” version is referred to a people-centered approach, with a focus on gaining commitment of staff, whereas the “hard” version emphasizes a resource-based approach characterized by an emphasis on business values and calculative approaches to human resource systems (Storey, 1992). Depending on the business environment and skills and motivations of employees, an appropriate form of Human Resource will be selected. However, as a number of commentators have pointed out, these two models are not mutually exclusive (Watson, 2004; Truss et al., 1997). There is usually an underlying logic of business values and a calculative approach to employees but this may be best served by adopting a high commitment model of employment relations (Watson, 2004). Watson (2004) also suggests that it may be an empirical possibility that the soft version can exist without thought for the business case and for the furthering of corporate purpose will be a mistake.
Recently, Paauwe and Boselie (2003) has extended beyond these traditional soft-and-hard HRM studies, by providing propositions to explain the impact of different institutional mechanisms, including coercive, normative and mimetic ones (DiMaggio and Powell, 1983), on the shaping of Human Resource strategies and practices in organizations. There are a number of studies that present strong empirical evidence of the linkage between HRM and performance across organizational settings. For instance, Huselid (1995) reveals that the organizations that link HR practices to strategy report higher performance outcomes. In a sample of 1,050 banks, Delery and Doty (1996) find modest support for a fit with the Miles & Snow (1978) typology. Similarly, Youndt et al. (1996) find support for this type of fit in a sample of 97 manufacturing plants.
However, MacDuffie (1995) explicitly rejects this hypothesis, claiming that in his study of car manufacturing plants, he has found no evidence that a “fit” of appropriate HR practices to mass production is able to compete with flexible production. Within the framework of contingency, Wright et al. (1994) argue that employee attitudes and role behaviors, derived from the behavioral view (Jackson et al., 1989), are required for the successful execution of the corporate objectives, rather than merely relying on the HR systems as traditionally assumed (Becker and Gerhart, 1996). This represents a tension between the core features of universal theory and those of contingency theory (Meyer et al., 1993). Thus, it implicitly gives rise to the notion that a combination of the HR practices and employee behaviors in a firm-specific context, so-called the configurational perspective, would enable human resources to constitute a source of competitive advantage.
Configurationally approaches - A third strand of the debate is the configurationally perspective which has emphasized the patterns of HR practices that predict superior performance when used in association with each other, or business strategy, or both (Delery and Doty, 1996). This approach is found on the assumption that an organization which displays a greater congruence between its bundles of HR practices and overall business strategy should achieve higher performance. The congruence, or “fit,” is developed into two classifications: horizontal and vertical fits (Gratton and Truss, 2003). Vertical fit refers to the alignment of HR policy and practice with a firm’s strategy (or objectives), which is in line with the external environment where the organization operates in (Schuler and Jackson, 1987). Horizontal fit is the degree to which HR practices, and other elements of the organization, structure, systems, processes and practices, are integrated to ensure cohesion (Guest, 1987).
As MacDuffie (1995: 201) remarks: “implicit in the notion of a ‘bundle’ (of human resources) is the idea that practices within it are interrelated and internally consistent, and that ‘more is better’ with respect to the impact on performance, because of the overlapping and mutually reinforcing effect of multiple practices.” With the configurationally perspective, “the distinction between best practice and contingency models begins to blur.” (Becker and Gerhart, 1996: 788) While some commentators argue for the idea of external and internal fit (e.g., Baird & Meshoulam, 1988; Hendry & Pettigrew, 1986), others argue for an identifiable set of best practices for managing employees that have positive effects on organizational performance ( Delery and Doty, 1996; Huselid, 1995).
Youndt et al. (1996) suggest that the two approaches are in fact complementary. The argument that these approaches are not in conflict has also been made by Becker and Gerhart (1996) and Guest et al. (2000). Becker and Gerhart (1996) assert that best practices have an architectural nature. That is, for example, the idea of incentives for high performance has a generalizable quality. But, within a particular firm, HR practices and their mix may be different, depending on context and strategy. As Becker & Gerhart (1996: 786) state: “two companies with dramatically different HR practices arguably have quite similar HR architectures. For example, although the specific design and implementation of their pay and selection policies are different, the similarity is that both link pay to desired behaviours and performance outcomes and both effectively select and retain people who fit their cultures.” In a similar vein, Guest et al. (2000: 3) put it: “the idea of ‘best practices’ might be more appropriate for identifying the principles underlying the choice of practices, as opposed to the practices themselves.”
Issues with human capital and performance linkage
The literature to date is unclear on the subject of how human capital should be measured and related to firm performance. Though much of the research has argued for a positive correlation between human capital development and organizational performance (Ulrich, 1997), the effective measurement of human capital remains problematic (Adams and Waddle, 2002). Pfeffer (1997) highlights the numerous pitfalls and measurement prejudices that are built around the issues of human capital measurement, but fails to provide further critical explanations of the discussed issues. Also, by extending the work of Gerhart et al. (2000), Wright et al. (2001) present empirical evidence on measurement error in measures of HR practices which calls for theoretical discussions in research design changes regarding how HR practices impact firm performance. The key problems over the human capital and performance linkage are drawn from the works of Truss (2001), Guest (1997) and Becker and Gerhart (1996) as follows:
1) Reverse causation - Do human capital processes lead to increased performance, or is the alternative equally as likely: that higher performing firms will have more resources to invest in better human capital development? If the causal link is to be established, there is a need to specify the intervening variables between human capital development and performance: “The fact that profit sharing is associated with higher profits can be interpreted in at least two ways: profit sharing causes higher profits, or firms with higher profits are more likely to implement profit sharing. However, if it can be demonstrated that employees in firms with profit sharing have different attitudes and behaviors than those in firms without profit sharing and that these differences also translate into different levels of customer satisfaction, productivity, speed to market and so forth, then researchers can begin to have more confident in the causal link.” (Becker and Gerhart, 1996: 793)
2) Time perspectives of measures - The majority of financial reporting and accounting systems focus on fairly short-term dimensions, as opposed to investments on human capital which tend to yield performance results over a medium-or long-term time period. Reichheld (1996) and Johnson and Kaplan (1987) provide empirical evidence concerning how traditional accounting systems fail to realize the significance of loyalty and continuity in relationships with customers, employees and investors, which may divert business practitioners away from making important managerial decisions. Pfeffer (1997: 362) calls for a coherent, practical human resource measurement system that revolves around influencing or directing behavior, rather than charting the overall productivity with multiple indicators for “to measure everything is, in the end, equivalent to measuring nothing.”
3) Rhetoric vs reality - Truss (2001) proposes that, instead of devising a list of the “best practice” in HR management and testing its impact on performance, the research investigation should be focused to which HR policies and practices are used by a financially successful firm. This exploratory methodology shows that the successful organizations do not always implement the “best practice” HR management. There is frequently a discrepancy between intention and practice (Sturdy and Fleming, 2003). Outcomes at the individual and organizational levels are complex and often contradictory. From these arguments, they raise the point that if human capital is, in a real sense, “best practice,” why is it that some organizations lack human capital processes and yet are successful in their purpose? and why don’t all firms adopt human capital principles? A simple answer would be that such firms may be considered themselves successful now, but the possibility of their sustaining success tends to be reduced by their failure to implement human capital concepts (Rastogi, 2000). The author agrees with Becker and Gerhart (1996: 786) who state: “more effort should be devoted to finding out what managers are thinking when they make the decisions they do. It thus suggests a need for deeper qualitative research to complement the large scale, multiple firm studies that are available.”
Human Capital And Complementary Capitals
Dess and Picken (1999:8) note: “[human capital is] generally understood to consist of the individual’s capabilities, knowledge, skills and experience of the company’s employees and managers, as they are relevant to the task at hand, as well as the capacity to add to this reservoir of knowledge, skills, and experience through individual learning.” From a definition such as this, it becomes clear that human capital is rather broader in scope than human resources. The emphasis on knowledge is important, and though the Human Resource literature has many things to say about knowledge, the debate is traditionally rooted in an individual level perspective, chiefly concerning job-related knowledge (e.g., Scarbrough and Carter, 2000; Lavigna, 1992). Whereas the human capital literature has moved beyond the individual to also embrace the idea that knowledge can be shared among groups and institutionalized within organizational processes and routines (Currie and Kerrin, 2003; Wright et al., 2001).
Rastogi (2000: 196) puts it: “The concept and perspective of human capital stem from the fact that there is no substitute for knowledge and learning, creativity and innovation, competencies and capabilities; and that they need to be relentlessly pursued and focused on the firm’s environmental context and competitive logic.” Such an argument leads to a crucial point. That is, the accumulation of exceptionally talented individuals is no longer enough for the organization to become successful. There must also be a desire on the part of individuals to invest their knowledge and expertise in their jobs and the organization. In other words, individuals are required to engage with work and commit to the organization if effective utilization of human capital is to happen. As Davenport (1999: 5) states: “High levels of commitment and engagement reinforce each other. For instance, the management team of Charles Schwab & Co. understands that commitment to the company is not enough to guarantee that employees will invest high effort in their jobs. People must also be engaged in their jobs.” According to the above statement, there are a number of critical writings that do take account of employee engagementand organizational commitment in relation to human capital ( Lee and Bruvold, 2003; Swailes, 2002; Davenport, 1999; Meyer and Allen, 1997).
Lee and Bruvold (2003) find that job satisfaction and affective commitment play a significant role in mediating the relationship between employees’ perceived investment in their human capital and intent to leave. Shore and Wayne (1993) discover that employees who feel supported over time also feel a greater obligation to the organization and thus tend to be more committed. Similarly, in the work of McDermott et al. (1992), the findings strongly suggest that employees who have access to resources, information, opportunity and support in their work environment are more likely to be engaged with their jobs. Some scholars have also explored the complementary aspects of human capital, namely intellectual capital (Nerdrum and Erikson, 2001), social capital (Nahapiet and Ghoshal, 1998) and organizational (or structural) capital (Davis and Meyer, 1998). It is viewed that these perspectives have provided critical perspectives of how human capital can be developed within an organization. In the following sections, the literature on these complementary capitals is briefly reviewed.
Intellectual capital
Plenty of arguments have been made in support of the need to understand intellectual capital better (Johnson, 2002; Sveiby, 2001; Edvinsson, 1997; Edvinsson and Malone, 1997; Brooking, 1996; Nonaka, 1994). Early work has focused on identifying some meanings of intellectual capital. For instance, Knight (1999: 23) defines intellectual capital as “the sum of the company’s intangible assets.” Wright et al. (2001a) supplement this definition by incorporating human capital, social capital and organizational capital into its description. In that sense, intellectual capital refers to the “knowledge and knowing capability of a social collectivity, such as an organization, intellectual community, or professional practice.” (Nahapiet and Ghoshal, 1998: 245) Ulrich (1998: 16) proposes a simple, yet implicitly measurable and practical, definition - “intellectual capital = competence x commitment.” These definitions seem to represent the extent to which intellectual capital is implicated in the process of leveraging and developing organizational knowledge, rather than seeking to establish the clear boundaries of intellectual capital. One of the critical arguments rests on the notion that intellectual capital and human capital are inextricably interrelated.
Warner and Witzel (1999: 75) argue that, “just as knowledge needs an active agency to achieve utility, so the human brain without knowledge is an empty vessel.” From the organizational perspective, the notion of knowledge stocks reinforces the importance of “organizational brain” developed through capable employees (Narasimha, 2000). Some scholars argue that knowledge does not seem to be susceptible to the scarcity theorem in economics. On the contrary, it is claimed that knowledge is supported by an abundance theorem (Nonaka and Nishiguchi, 2001). It implies that knowledge can be utilized over and over without diminishing value (Stewart, 1997). The more knowledge resources are applied, the more these resources create the value (Drew, 1996). Given the interest of value creation, this illuminates an avenue of research on how to measure and quantify intellectual capital in accounting systems (Bontis, 2001, 1998), supported by the empirical findings of firms in Asia, Europe and the Middle East (Ordónez de Pablos, 2002).
Another argument is that the embeddedness of intellectual capital in both people and systems has been part of a debate in the knowledge management field (Rastogi,2002; Wright et al., 1998). Argyris (1992) asserts that all organizational learning takes place inside human heads. On the other hand, Nelson andWinter (1982), cited by Nahapiet and Ghoshal (1998), argue that the significance of contextually embedded forms of knowledge and knowing as a resource differs from the simple aggregation of individual knowledge. This argument has reinforced the importance of organizational knowledge (Spender, 1996) by which a form of collective knowledge (i.e., information sharing among group members) is prevailed (Chua, 2002).
Narasimha (2000) develops a framework of organizational knowledge that concentrates on five specific dimensions and explicates their roles in assuring sustained competitive advantage. They are tacitness and codifiability of knowledge, architectural and component knowledge, exploratory and exploitative knowledge, competency (or the variety-generating capability) of knowledge, and depth/breadth of knowledge. Tacit knowledge (or knowing how), which cannot be articulated, defines and gives meaning to its complementary dimension, explicit knowledge (or knowing that) (Lubit, 2001; Howells, 1996). It thus creates the condition where the knowledge value becomes inimitable by rival firms to develop similar knowledge, thereby building competitive advantage (Lubit, 2001; Athanassiou and Nigh, 2000).
However, it is argued that this condition may pose a challenge for transferring knowledge across business units within the firms. And that the organizations are required to focus more on exploratory knowledge which entails innovation (Kleysen and Street, 2001; Lubit, 2001; Narasimha, 2000). The process of creating new knowledge encompasses the domains of combination – incrementally or radically – at the individual level and of exchange at the collective level, through social interaction and coactivity (Nahapiet and Ghoshal, 1998). The latter one has fuelled a recent discussion on developing core competency as a source of competitive advantage (Foil, 2001). That is to say, the notion of collective learning on a teamwork basis enhances coordination of diverse skills and integration of innovation streams (Belbin, 2001; Prahalad and Hamel, 1990), thereby constituting a major way to develop human capital (Cunningham, 2002).
Social capital
Numerous scholars have conceptualized social capital as a set of social resources embedded in relationships ( Gant et al., 2002; Tsai and Ghoshal, 1998; Burt, 1997, 1992). As such, social capital can be defined as “the sum of the actual and potential resources embedded within, available through, and derived for the network of relationships possessed by an individual or social unit.” (Nahapiet and Ghoshal, 1998: 243) To examine this definition closely, some researchers essentially refer social capital to as “the stock of active connections among people: the trust, mutual understanding and shared values and behaviour that bind the members of human networks and communities and make cooperative action possible.” (Cohen and Prusak, 2001: 4) Hence, viewed broadly, social capital encompasses many aspects of a social context, such as value systems and social ties, which contribute to development of both human and intellectual capital through effective communication (Hazleton and Kannan, 2000; Baker, 1990) and trust (Fukuyama, 1995).Social capital is an intangible asset capable of delivering the collective network value within the organization over time (Leana & Van Buren, 1999; Powell, 1990), despite occasional uncertainties.
Adler & Kwon (2002: 21) put it: “Through investment in building the network of external relations, both individual and collective actors can augment their social capital and thereby gain benefits in the form of superior access to information, power and solidarity; and by investing in the development of their internal relations, collective actors can strengthen their collective identity and augment their capacity for collective action.” Early attempts have been made to distinguish between human capital and social capital but none of them have provided a conclusive explanation. At the individual level, human capital resides with the people, whereas social capital is embedded in the relationships among them (Hüppi and Seemann, 2001). Implicitly, individuals with better social capital or stronger contact networks tend to “earn higher rates of return on their human capital” (Garavan et al., 2001: 52) and are consistently motivated to promote innovation (Rastogi, 2000). Equally important, at the firm-specific level, social capital expedites the creation of intellectual capital (Hargadon and Sutton, 1997) and cultural change (Goffee et al., 1998) through which the appropriate conditions need to be established for the exchange and combination of knowledge to take effect (Nahapiet and Ghoshal, 1998). By linking to the context of intellectual capital, there are three major dimensions of social capital to be considered: a structural dimension (i.e., network ties, network configuration and appropriable organization); a cognitive dimension (i.e., shared codes and languages and shared narratives); and a relational dimension (i.e., trust, norms, obligations and identification) (Kostova and Roth, 2003; Nahapiet and Ghoshal, 1998).
In association with the RBV theory, social capital, with a focus on links among individuals, creates the conditions for connections, which are non-imitable, tacit, rare and durable. McElroy (2002) proposes that the concept of social innovation capital is the most valuable form of intellectual capital because it underlies a firm’s fundamental capacity to learn, innovate and adapt through collective team efforts. On the other hand, Gratton and Ghoshal (2003: 3) argue that social capital is based upon the twin concepts of sociability and trustworthiness, as remarked: “the depth and richness of these connections and potential points of leverage build substantial pools of knowledge and opportunities or value creation and arbitrage.” This argument suggests that, as trusting relationships are developed through social interactions inside a network, the more trustworthy group members is perceived by others within the network, the more knowledge they are willing to share among each other.
Organizational (Structural) capital
A growing body of literature in structural capital indicates that a firm’s investment in organizational structure can contribute in crucial ways to its productive capacity (Blair & Wallman, 2001; Robertson et al., 1993; Ford & Randolph, 1992; Ingham, 1992). A basic assumption is that organizational capital consists of “all the firm-standard business processes, systems, and policies that represent the accumulation of experience and learning by many people over many years.” (Davis and Meyer, 1998: 16) This assumption suggests that the concept of organizational capital plays a critical role in linking a bundle of organizational resources into a systematic process, which facilitates value creation for customers and firms’ competitive advantage (Dess and Picken, 1999; Tomer, 1987). In support of this view, Brynjolfsson et al. (2002) and Stewart (1997) reveal that a number of recent studies have characterized a wide range of organizational capital components as summarized below:
- Organizational and reporting structures (Ingham, 1992)
- Operating systems, processes, procedures and task designs (Black and Lynch, 2002)
- Decision processes and information flows (Gort et al., 1985)
- Incentives and performance measurement systems (Becker and Huselid, 1997); and
- Organizational culture and commitment (Tomer, 1998).
The interactions among these dimensions are important to motivate organizational members to develop their skills and knowledge. For example, Black & Lynch (2002) propose that the use of cross-functional production process results in more flexible allocation and reallocation of workers, both managerial and non-managerial, in the firm. Job rotation and job share arrangements are associated with the introduction of work design, which allows employees to share knowledge across functions.
Another study done in relation to cross-functional organization forms (i.e., matrix structures) provides a theoretical understanding of this structure through both positive and critical views (Ford and Randolph, 1992). For instance, Joyce (1986) suggests that a matrix improves information processing by formalizing lateral communication channels and legitimizing information communication. Whereas Davis & Lawrence (1978) argue that functional managers in a matrix organization are likely to experience a loss of status, authority and control over their traditional domain, thus potentially resulting in resistance to developing their managerial skills.
Moreover, an architectural stance of the routines and processes (Currie and Kerrin, 2003; Wright et al., 2001a), including workforce diversity and corporate culture (Denison, 1990), can also either enable or disable the development of knowledge and work systems. Within this context, Davis and Lawrence (1977), cited in the work of Ford & Randolph (1992), view that corporate culture characterized by a rigid bureaucracy, minimal interdepartmental interaction and strong vertical reporting lines are not very receptive to cross-functional and matrix structures. On the contrary, a matrix-structured firm operating in multiple countries is well in a position to create a culture of diversity of workforce in order to bring about differences in work-related values ( Hampden-Turner and Trompenaars, 1993; Hofstede, 1980) and to foster individuals’ creativity (Cox, 2001). According to these arguments, it can be implied that organizational structures should support the mandate of the corporate practices, like reengineering or culture change, and so have sufficient variety to accommodate such changes.
Stewart (1997) proposes two objectives of organizational capital initiatives. One is to codify the body of knowledge that can be transferred, along with preserving the significant ingredients of knowledge that might be lost. The other is to connect people with data, experts and expertise (including bodies of knowledge) so as to accelerate the flow of the information inside the company. Tomer (1998: 834) supports this view by stating that:“Unlike pure human capital that is embodied only in individuals, pure organizational capital is embodied only in the relationship among individuals.” On the other hand, Stewart (1997) raises a critical point, despite the absence of empirical support, by arguing that there is a danger of over-investing in knowledge. It may lead to the state of de-capitalization on other resource values which are essential to building competitive advantage. From these arguments, it can be assumed that senior managers should seek more information about organizational capital, by at least in part being critical of its managerial benefits. This information might allow human capital to be allocated more effectively within organizations and may further enable gaps in skills and abilities to be more easily identified (Mayo, 2001).
HUMAN CAPITAL, HUMAN RESOURCES: RHETORIC AND REALITY
Both human capital and SHRM have become popular among organizations in terms of their philosophy and techniques. However, the increasing adoption of these approaches may only be an imperfect indicator of their actual adoption and/or implementation. For instance, a firm perhaps seeks to convince external constituencies that it adopts leading management practices to gain a reputational advantage, or to gain institutional legitimacy (DiMaggio and Powell, 1983), even though reality may not match rhetoric (Staw and Epstein, 2000; Zbaracki, 1998). This example reflects a critical issue of a gap between what the firm is intended to achieve and what the firm is actually destined to implement. Legge (1998, 1995) however argues that both “rhetoric” and “reality” are equally “real,” and in setting up this distinction, the present study aims not to give ontological priority to either aspect. Rather, a focus of this dissertation on rhetoric and reality is to explore the understandings that employees, including middle managers, construct when they experience human capital. Having stated that, the author follows Zbaracki’s (1998) approach in examining the relationship between what people say or written policies state - (in this case, the rhetoric of human capital use) and what people do - (the reality of human capital use). In this context, rhetoric is defined as the managers’ stated claims and accounts of human capital use, especially in the context of ongoing organizational life (Zbaracki, 1998). It involves a range of techniques, using primarily language to inform plans to use human capital, and communications to inform about its implementation progress. This is consistent with Barley & Kunda’s (1992: 363) definition of rhetoric as “a stream of discourse used to construct, spread, or sustain a set of assumptions” about an issue or subject. Reality is defined by Zbaracki (1998) as the models of human capital that people construct, focusing specifically on the tools used and the meanings made in those models.
The term “rhetoric” has been used widely in HRM for over a decade (Carter and Jackson, 2004; Legge, 1995). Some scholars comment that the word has a cynical, pejorative connotation, seeking to “persuade someone to do, think or feel something for an ostensible reason when the actual reason is quite different.” (Carter and Jackson, 2004: 472) One of the critical and political views on rhetoric is that it tries to mask reality in order to gain compliance and consent of the work group. Keenoy (1990: 375) argues that the chief purpose of rhetoric “might be to provide a legitimate managerial ideology to facilitate an intensification of work and an increase in the commodification of labor.” This argument is supported by a realization that the unitarism of the workplace (the assumption that the interests of managers and employees can be aligned) advocated by many HRM theorists is far from realization within the workplace, and that competing interests and asymmetrical power relations between them remains the norm.
However, it is not the intention of the author to use rhetoric in this way. Such an interpretation calls into question whether senior managers who are using and spreading the rhetoric through discourse (e.g., written policies) actually believe it, and if not, then their cynicism is plain. The author remains neutral about this possibility as the above definitions suggest, and stays close to the un-pejorative use that holds rhetoric to be about language and communication. The author aims to allow the empirical data and analysis to assess how rhetoric is construed and enacted within the organization. There is strong similarity between this approach and the distinction between espoused theory and theory-in-use made by Argyris (1989). He views that espoused theory means “what people say or [organizations] espouse” (Argyris, 1980: 208), or rhetoric, which is in contrast with theory-in-use, or reality, defined as that is “used to produce the actual behavior.” (Argyris, 1980: 208) Individuals seem to be unaware of their intended behaviour because they have learned it through acculturation and experience, as stated by Argyris (1980: 208): “all skillful actions are learned when people internalize rather complex programs.”
Argyris (1960) argues that formal aspects of organizations produce defensive routines, routines that are generated by fear and doubts about the organization’s direction or processes and practices, and such routines are designed to reduce what may be embarrassing or threatening for the employee. These routines produce “underground” or “subversive” behavior entailing distortions of information and rigidity through resistance. There are a number of empirical studies that examine the gap between espoused rhetoric and enacted reality in various respects, such as organizational learning (Easterby-Smith and Lyles, 2003), Human Resource competency (Garavan and McGuire, 2001), HR development (McCracken and Wallace, 2000), psychological contract (Grant, 1999), HR management (Watson, 1995) and HR strategy (Gratton, 1994). For example, Easterby-Smith and Lyles (2003: 51) put it: “Essentially this distinction states that there is usually a difference between what people say they believe and the beliefs that another observer may deduce from their behavior. Thus, classically, if a manager says that she encourages all subordinates to speak their minds in front of her [espoused theory] but she then reprimands a subordinate for being ‘disruptive’ or ‘aggressive’ when arguing an unpopular position in a meeting, one might observe that there is a contradiction between the ‘theory-in-use’ and the earlier statement of espoused belief.” This distinction, between espoused theory and theory-in-practice, will be used to explore the development of human capital in an organization in the current research.
Making sense of rhetoric: Managerial cognition and psychological contract
Introducing human capital initiatives into an organization requires changes to policy, practice and processes. A crucial factor in trying to understand such changes within organizations is managerial cognition (Isabella, 1992; Daft and Weick, 1984). For instance, in the work of Barr et al. (1992), they conclude that the mental models of managers may be better predictors of organizational change than other managerial characteristics, such as succession, age and education. Although there have been a number of theoretical strands in the managerial cognition literature, a common assumption is that managers need to ascribe meanings toward complex issues, choosing among many possible interpretations (Thomas et al., 1994; Weick, 1979).
There has been growing research on topics of interpretations, in particular on the effect of multiple contexts (Thomas et al., 1994). One of the dominant issues is the extent to which managers perceive issues as either opportunities or threats (Gioia and Thomas, 1996), and the other is related to the nature of political activity where various individuals or groups may seek to impose their views toward the issues (Dutton, 1999). These theoretical frameworks provide a basis for various areas of empirical studies, such as organizational images (Dutton et al., 1994) and environmental changes (Milliken, 1990). Linked to the concept of interpretation is that of reciprocal social exchange relationships based on dependence and discourses (Bacharach et al., 1995). Different employees use different framing - cognitive sense making of events and actions - in order to interpret information, to determine how old information is remembered and how inferences are drawn from past events and at times when information is missing (Weick, 2001; Reger et al., 1994). This plurality of interpretations obviously poses considerable challenges for organizations attempting to narrow the gap between what they are espousing and what they want employees to enact.
A key assumption is therefore that “each party brings to the exchange relationship his or her own specific ends and his or her own specific means for achieving them and that underlying these specific means and ends is some general logic or cognitive framework that guides each party’s behavior.” (Bacharach et al., 1996: 477) The nature of social exchange relationships (Blau, 1964) has been examined in the growing literature on the psychological contract (Sparrow, 2000; Rousseau, 1995). Psychological contracts, viewed broadly, refer to the relationship between employee perceptions of what they owe to their employers and what their employers owe to them (Millwardand Brewerton, 2000). As derived from the works of Herriot and Pemberton (1995), Schein (1978) and Argyris (1960), some scholars define the psychological contract as an individual’s beliefs about the terms and conditions of a reciprocal exchange agreement between that person and the organization (Rousseau, 1995). Unlike formal or implied contracts, the psychological contract is inherently perceptual, and thus one party’s understanding of the contract may not be shared by the other (Rousseau, 1990). Probing beneath the notion of the psychological contract, it is argued that the concept of expectations determines employees’ motivation to work and therefore their behavior at work (Steers et al., 1996). Descriptions of the expectations borrow heavily from expectancy theory (Robbins, 2003) in a sense that the psychological contract is influenced by individuals’ desired goals and outcomes (Stiles et al., 1995; Herriot et al., 1993).
However, one of the main arguments is that the psychological contract should be distinguished from expectations (i.e., general beliefs held by employees about what they expect to give and receive in the working relationship) (Rousseau and Parks, 1993). For example, new managers have expectations to receive a high salary or be promoted because their expectations are developed through a variety of sources, such as past experiences and social norms. Whereas psychological contracts, by contrast, entail beliefs about what employees believe they are entitled to receive or should receive, because they perceive that their employer conveys promises to deliver those things. Thus, only expectations which emanate from perceived implicit or explicit promises by the employer are part of the psychological contract (Kotter, 1973). It can be argued that, although psychological contracts produce some expectations, not all expectations emanate from perceived promises (Sparrow, 1996). For example, if new managers believe they are promised pay commensurate with performance at the time of hire, it does not only create expectations but also a perceived obligation through which the employer is expected to deliver. Researchers have also emphasized that psychological contracts are held by employees, representing employees’ beliefs about obligations between them and the organization, rather than any specific agent of the organization. In a sense, the organization assumes an anthropomorphic identity in the eyes of the employee.
Nonetheless, the organization is not seen as possessing a psychological contract of its own. Rather, it provides the context for the creation of a psychological contract, which organizations cannot perceive, though their individual managers can themselves personally perceive a psychological contract with employees and respond accordingly. Another argument is that there is an important distinction in the literature between psychological contracts that are largely transactional in nature and those that are largely relational (Robinson et al., 1994). A contract at the transactional end of the continuum is composed of specific short-term and financial obligations entailing limited involvement of the parties. A contract at the relational end of the continuum, in contrast, entails broad, open-ended and long-term obligations; it is based on the exchange of not only monetary elements (e.g., pay for service) but also socio-emotional elements such as loyalty and support.
It can be assumed that the concept of human capital, with its promise of empowerment, devolved leadership and enhancing the skills, knowledge and behaviour of individuals, is implicitly offering a contract at the relational end of the spectrum. In the critical literature on this subject, a breach of the psychological contract is of a subjective experience, referring to one’s perception that another has failed to fulfil adequately the promised obligations of the contract (Johnson and O’Leary-Kelly, 2003; Robinson, 1996). It has no objective materiality (Grant, 1999). This is not to say that they are without impact on behaviour or have no concrete consequences. It is an employee’s belief that a breach has occurred which affects his or her behaviour and attitudes, regardless of whether that belief is valid or whether an actual breach has taken place (Sparrow, 1998). This can be assumed that introducing an initiative such as human capital involves change and as such could be said to threaten existing psychological contracts. The cognitions of employees thus become highly important in interpreting the nature and working of the human capital program, and the subsequent attitudes toward efficacy.
2.6 CRITICAL VIEWS ON HUMAN CAPITAL
Much of the literature on human capital development has focused on reporting the voice of management or managerial views, with less critical of its drawbacks (Clark et al., 1998). This has been particularly prevalent in the management consulting field where management fads are largely created, labelled and embraced (Abrahamson, 1996), as noted by Gibson and Tesone (2001: 123): “…one author refers to those who initiate fads as fashion setters, and identify them as consultants.” For example, the human capital index (HCI) designed by the HR consulting firm Watson Wyatt (WW), aims to demonstrate a relationship between the effectiveness of a company’s human capital and shareholder value creation. The WW consultants claim that a significant improvement in five key areas of human capital practices is associated with a 47 percent increase in market value; what is prone to be sustainable over time. These areas include recruiting and retention excellence, total rewards and accountability, collegial and flexible workplace, communications integrity and focused HR service technologies (Pfau and Kay, 2002). Similarly, Mercer Human Resource Consulting and Arthur Andersen (a former leading HR consulting firm) have also developed models for human capital performance that, as they claim, promise dramatic results (Friedman et al., 1998).
A critical view in evaluating human capital as a concept may begin with the fact that those who are on the “receiving end” of such a practice have received little attention in the literature (Bryne, 1986). The normative strands in the literature have argued for a strategic linkage between organizational and HR/human capital strategies, and that the individual components of HR/human capital be linked and actually generate positive outcomes (Hitt et al., 2001; Gerhart, 1999; Hiltrop, 1996; Fombrun et al., 1985). The idea of fit, or alignment, has thus become a central focus of academic endeavour in the field, and achieving fit is likely to build competitive advantage (Snell et al., 2000). The implication is that an emphasis on competitive advantage brings with it an emphasis on HR/human capital in terms of developing “appropriate” processes and practices aimed at generating knowledge and competency that support business strategy (Gratton, 2004, 2000).
A general trend in research on these subjects has therefore been essentially managerialist, supporting “the activity and actions of management and as a consequence can be seen to be a powerful and new form of managerial rhetoric.” (Clark et al., 1998: 5) From these arguments, human capital and HRM can be viewed as a further (and new) form of managerial control (Townley, 2002, 1993). This form of control is not engineered through traditional management practices, but through the development and socialization of employees. Human capital mechanisms can be viewed as levers through which the values of the firm are internalized in employees, who perhaps exercise a form of self-control in alignment with the interests of the senior management (Foucault, 1977). Also, it derives from the reframing of the employment relationship to emphasize a new “reality” (Clark, 1996) in the workplace “where there are a plurality of views and interests and where the convergence between the values of the organization and those of the employee cannot be taken for granted.” (Ezzamel et al., 1996: 78).
However, some scholars take a critical view by considering managerial control as “a process which aims limiting individualistic behavior of the organization’s members to bring their activities into conformity with the rational plan of the organization.” (Saxberg and Slocum, 1968: 476) A managerial discussion about the promise of HR/human capital, with an emphasis on its ability to deliver certain outcomes, has been criticized as glossing over the inherent contradictions within the workplace. Recent research suggests that, at the organizational level, the focus on improvements in effectiveness, efficiency and productivity that have been part of the human capital and HRM has been accompanied by a corresponding emphasis on cost control and redundancies (Wilkinson and Willmott, 1995). This condition tends to increase the probability of cynicism and decrease the probability for psychological success (Amundson et al., 2004; Hallier and Lyon, 1996). Therefore, for some commentators, greater sophistication in the management and evaluation of employees, such as commitment, empowerment, and involvement, has been signaled an intention by organizations to increase surveillance of employees. This highlights an instrumental view of HR/human capital as being a means to an end (Legge, 1998; Townley, 1994). The intended form of control seeks to work by ensuring employees internalize the values and ethos of the organization to deliver, as Willmott (1993: 519) puts it: “their uniquely human powers of judgment and discretion are directed unequivocally toward working methods that will deliver capital accumulation.”
This self-disciplining approach, embedding the desires of the firm into the subjectivity of the individual, has been criticized as inducing brainwashing (Willmott, 1984) and reducing individuality (Legge, 1984). However, Watson (1994) argues that employees, including managers, more or less actively and critically interpret and perhaps resist corporate rhetoric. For example, some employees challenge the organizational rhetoric, articulated by managers, which is intended “to establish a discourse that represents employees in terms of the skills they are deemed to possess rather than the jobs they occupy.” (Alvesson and Willmott, 2002: 628) They seek to defend this discourse, by instead emphasizing the value of job security for maintaining morale through an argument that their lowered morale may carry an adverse consequence against organizational performance (Alvesson and Willmott, 2002). Another important issue is the high expectations placed on human capital and HRM programs to change the workplace. There can often be a huge amount of optimism from employees about the potential for such approaches. But Skinner & Mabey (1997) argue that successes are more the exception than the rule; differences between the perceptions of managers and employees generally emerge and remain, due to failures of design, implementation or trust (Fuguyama, 1995).
These views suggest that introducing the concept of human capital within an organization may not be a neutral and unambiguous intervention. In this dissertation, the nature and workings of human capital will be examined and its interpretation by the recipients of the rhetoric assessed. The author seeks to avoid the danger, identified by a number of writers, of portraying ordinary people as passive “dupes of ideology.” (Watson, 2004: 452).
Resistance
Allied to critical views on human capital development is the concept of resistance. Resistance to organizational initiatives, such as human capital programs, may come from the individual, group and organizational level (Jick, 1995; Kanter et al., 1992). At the individual level, issues of uncertainty, habit, anxiety, protection of power and mistrust of the organization are clear sources of resistance (Oreg, 2003). At the group level, issues around group norms, groupthink and entrenched power positions are prominent (Robbins, 2003). At the organizational level, culture, path dependency, bureaucracy and hierarchy may all inhibit the change in organizational initiatives (Hendry and Pettigrew, 1992). According to the work of Szulanski (1996), it is argued that one way to examine resistance is to use a communications model, closely looking at the source, content, context and the recipient of the organizational initiative.
The source - The more expert and trustworthy the source of the organizational message, the greater the likelihood of it being accepted by employees (Szulanski, 1996; Perloff, 1993). The literature suggests that, in large organizations, responsibility for major strategic decisions and organizational rhetoric usually rests with top management, mostly reflecting through broad-ranging and superficial discourse (Legge, 1995). The degree to which lower levels managers are excluded from the decision-making process may increase resentment about the rhetoric (Westley, 1990) and increase their sense of powerlessness (Izreali, 1975), with the result that lower level employees may impede or ignore the organizational rhetoric.
The content - The equivocality of the content of the organizational change message seems to increase its potential to be subject to multiple interpretations (Daft and Lengel, 1986). Ambiguity or poor framing in terms of the target audience tends to reduce the message’s impact and hamper the issue interpretation process (Webster and Trevino, 1995). The relevance of the message to its target audience (Szulanski, 1996) and whether the content constitutes a threat or opportunity to that audience (Staw et al., 1983) will also affect its interpretation.
The context - Organizational context can have a powerful influence on employee cognitions, particularly where the absorption of messages is concerned (Spreitzer, 1996; Thomas and Velthouse, 1990). Thomas et al. (1994) argue that because large organizations have complex structures, differentiated units and a high degree of internal diversity, they tend to create strong inertial forces which limit the degree to which new information or rhetoric may be accepted. Daft (2003) asserts that these forces are usually accompanied by difficulties in communication due to the complexity of the organization. Though there is an increase in communication linkages, communication between organizational levels becomes even more difficult (Damanpour, 1991; Hull and Hage, 1982). It is because they have greater differentiation in terms of organizational structure and hierarchy. Organizational rhetoric will, in this type of environment, pass through various levels of the corporate hierarchy and across the variegated structure. Differences of interpretation and implementation from managers and employees at different levels may affect how the rhetoric is actually manifested.
Zbaracki (1998) argues that the potential success of organizational rhetoric being implemented in intended fashion is influenced by the nature of the processes and practices within the organization which will serve to embed the information. Part of this involves the nature of the communication channels themselves, their efficiency and effectiveness. There have to be systems in place to ensure that the plans and policies of the organization are being implemented and where there may be problems which can lead to their revision and improvement. Ghoshal and Bartlett (1990) support this view by indicating that clear standards for the new plan/value, consistent incentives and sanctions to reinforce the rhetoric, and formal opportunities to provide feedback should be established to foster the flow of organizational rhetoric.
However, a critical concern for the rules of the game is “a set of assumption, norms, values and incentives - usually implicit - about how to interpret organizational reality, what constitutes appropriate behavior, how to succeed.” (Ocasio, 1997: 196) These rules are products of the firm’s history and culture; and they determine to a large extent the boundaries of strategic decision-making and organizational responses to competitor moves. They are strongly bound up with the concept of organizational identity (Gioia and Thomas, 1996) which is defined as “the set of constructs individuals use to describe what is central, distinctive and enduring about their organization.” (Reger et al., 1994: 568) Reger et al. (1994a) also suggest that resistance to organizational initiatives occurs because beliefs about the organization’s identity constrain employees’ understanding and create cognitive opposition to change efforts and their rhetoric. Another critical issue is that political behaviour within and among groups, may affect interpretation of organizational rhetoric.
According to Cyert and March (1963), organizations represent environments where individual and coalitions seek to impose their views on organizational issues and to effect control on decision-making. As a result, various factions or individuals may attempt to distort information in order to protect their self-interest (Thomas et al., 1994).
Characteristics of the recipient - Selective perception is another key concern for resistance to organizational rhetoric (Beyer et al., 1997). It refers to the phenomenon that managers only attend to the information in a situation which relates specifically to the activities of their department. Such practice is a sub-optimal information processing strategy and militates against organization-wide rhetoric (Walsh, 1988). Cohen and Levinthal (1990) argue that employees’ motivation to accept the rhetoric is affected by calculations as to whether they tend to benefit or be adversely affected by the proposed rhetoric of change, and whether the change is convincingly framed and supported by enabling structures such as communications, rewards and career management approaches. In sum, these considerations show that implementing major initiatives such as human capital is complex and integrating the understanding of human capital within employees with their everyday reality of work is far from a well-understood phenomenon. The introduction of human capital into the organization requires attention to the change dynamics highlighted above, and given these are organization-wide issues, the difficulty of securing acceptance of the human capital program become even more considerable.
Organisational Performance
The first problem in defining performance is that the definition of performance will depend on the stakeholder involved. Organisations inevitably have an array of stakeholders, and any particular measure of performance often tends to compete against another (Denison, 1990). Shareholders prefer performance in dividends, while managers regard performance in operational processes as important. From a traditional perspective, organisational performance is commonly referred to as financial performance where considerations of budgets and assets are crucial in determining the overall bottom-line of an organisation (Yeo, 2003). According to Langton (2000) performance implies the action of doing things, using things, and attending to conditions, processing, communicating, and achieving results. It is not a static concept, but an active concept. Langdon (2000) describes performance as consisting of four dimensions:
- Behaviour
- Standards;
- Support
- Human relations.
An organization cannot perform unless all four layers are present. A high performance organization is one in which the culture provides employees With the accountability and responsibility necessary to meet customers’ needs in a timely manner to ensure business success (Allerton, 1998). He defines characteristics of a high performance organization as follows:
- Well-understood vision and values help guide decision-making;
- Decision making occurs at the lowest level;
- Risk taking is encouraged;
- Performance feedback comes from peers, customers and direct reports.
From Allerton’s definition it is clear that he is of the opinion that a specific type of culture is important to create the environment in which an organization can perform. Not all corporate cultures will allow decision making at the lowest level or encourage risk taking. As Jacobs (2005:1) states in his article: “How a company decides who is authorised to make what types of decisions can have a profound effect on its business, both in terms of everyday effectiveness and the bottom line.”
Factors Affecting Performance
Cummings and Worley (2005) advocate that six factors other than culture can affect the performance of organizations. The key components of the six elements are as follow:
- Context: Context refers to the environment in which the organization operates and includes both external and internal environments. Organizational characteristics such as business strategy, strategy and structure as well as organizational culture form part of the context.
- Purpose: This will represent the goals and objectives of the organization. in this study it will focus on the objective of achieving a five-day service level agreement.
- Composition & Diversity: The demographics of the group will be identified in this variable.
- Structure: Size of the group will be taken into account.
- Processes: The formation and socialization processes play a critical role in the performance of an organization. This ties back to Schein’s (1984) where he stated that a group must be together for a long enough time to resolve problems. It can therefore be concluded that performance can be determined by the length of time that a group has been working together.
- Leadership: The type of leadership behaviour will have an influence on performance. Research has shown that a transformational leadership style does result in increased performance (Lok and Crawford, 2004).
The theory on performance management
Performance management may be defined as a formal and systematic process, by means of which the job-relevant strengths and weaknesses of employees are identified, observed, measured, recorded and developed. Performance management provides the opportunity for the organization to evaluate and take stock of its human resources. It also provides information so that important decisions can be taken and gives feedback for further development of staff (Doris, 1994:160).
It gives management the opportunity for communication with staff, to clarify expectations and to take part in the development of each staff member. For the employer, it gives the opportunity to discuss with employees their performance and career goals for the future (Doris, 1994:161).
Performance management is an ongoing communication process, undertaken in partnership, between an employee and his or her immediate supervisor that involves establishing clear expectations and understanding about:
The essential job functions the employee is expected to do.
How the employee’s job contributes to the goals of the organization.
What “doing the job well” means in concrete terms.
How employee and supervisor will work together to sustain, improve, or build on existing employee performance.
How job performance will be measured.
Identifying barriers to performance and removing them.
Performance Criteria
Three types can be found:
Trait based criteria: Focus on the personal characteristics of an employee, for example; loyalty, dependability, creativity and communication skills. The focus is on what a person is and not on what he or she does or accomplish on the job.
Behaviour based criteria: These are concerned with specific behaviours that lead to job success.
Outcome based criteria: focus on what was accomplished or produced rather than how it was accomplished or produced. This type of criterion is not appropriate for every job and that often it is criticized for missing important aspects of the job, such as quality.
The Relationship Between Human Capital And Organization Performance
The human capital focuses on two main components: individuals and organizations. According to Garavan et al., (2001) human capitals have four key attributes as follows: (1) flexibility and adaptability (2) enhancement of individual competencies (3) the development of organizational competencies and (4) individual employability. It shows that these attributes in turn generate additional values to individual and organizational outcomes. There are various findings that incorporate human capital with higher performance and sustainable competitive advantage (Noudhaug, 1998); higher organizational commitment (I1es et al., 1990); and enhanced organizational retention (Robertson et al. 1991). Hence, all this debates fundamentally focuses on individual and organizational performance. From the individual level, Collis and Montgomery (1995) point out that the importance of human capital depends on the degree to which it contributes to the creation of a competitive advantage. From an economic point of view, transaction-costs indicate that firm gains a competitive advantage when they own firm-specific resources that cannot be copied by rivals. Thus, as the uniqueness of human capital increases, firm have incentive to invest resources into its management and the aim to reduce risks and capitalize on productive potentials. Hence, individuals need to enhance their competency and skills in order to be competitive in their organizations. A skill is the learned capacity to carry out pre-determined results often with the minimum outlay of time, energy, or both. Skills can often be divided into domain-general and domain-specific skills. For example, in the domain of work, some general skills would include time management, teamwork and leadership, self-motivation and others, whereas domain-specific skills would be useful only for a certain job. Skill usually requires certain environmental stimuli and situations to assess the level of skill being shown and used. Employees need a broad range of skills, particularly the domain specific skills, in order to contribute to the success and performance of the organization so that the firm can be competitive.
Empirical Review
Chigozie, Aga and Onyia (2018) conducted a study to evaluate the effect of human capital development on organizational performance in manufacturing industries in South-East Nigeria. 306 copies of the questionnaire were returned and accurately filled out of the sample size of 358. The study’s hypotheses were analyzed with the use of F-statistics (ANOVA) tool. The findings showed that knowledge has positive significant effect on product quality F (95, n=358) = 2181, P<0.05.
Likewise, Issa, Ukoha and Nwuche (2017) examined the relationship between human capital development and corporate performance with Food and Beverages Firms in Port Harcourt as the case study. The study adopted Spearman’s Rank Order Correlation Coefficient. The results of the analysis revealed that there were strong correlation between the dimensions of human capital development and the measures of corporate performance.
In the same vain, Afrah (2016) carried out a study on the role of human capital on organizational performance in Benadir University in Mogadishu, Somalia. Self-administered questionnaires were employed to collect the data from the respondents and then SPSS was utilized for the analysis of the collected data. The findings of the study revealed that the role of human capital on organizational performance is key for institution’s success as HR practice plays a significant role in building the capacity of the employees.