Having a Human Resource Manager in a Canadian Small Business: What Difference Does It Make

HAVING A HUMAN RESOURCE MANAGER IN A CANADIAN SMALL BUSINESS: WHAT DIFFERENCE DOES IT MAKE?

Published in the Journal of Small Business and Entrepreneurship. 17, p. 293-300.

Sean A. Way

The ChineseUniversity of Hong Kong

Faculty of Business Administration

Department of Management and

School of Hotel and Tourism Management

Shatin, N.T., Hong Kong SAR

Telephone: (852) 2609 8779

Email:

James W. Thacker

University of Windsor

Faculty of Business Administration

401Sunset Avenue

Windsor, ON

N9B 3P4

Telephone: (519) 253-4232 Extension 3144

Email:

Sean A. Way is an assistant professor, School of Hotel and Tourism Management and Department of Management, Faculty of Business Administration, The Chinese University of Hong Kong. His current research interest is human resource flexibility, strategic human resource management, and organizational effectiveness.

James W. Thacker is a professor, Faculty of Business, University of Windsor. His current research interest is strategy development and human resource management implications in the small business sector.

Send all correspondence to James W. Thacker

Having a Human Resource Manager In a Canadian

Small Business: What Difference Does it Make?

This study examined the influence of having a human resource (HR) manager in a small organization (less than 500 employees) in terms of the types of HR practices that are employed. Results indicated those organizations with no HR manager were less likely to utilize effective interviewing techniques, link pay to performance, or have formal training in place, when compared to those that did have an HR manager. There were no differences between the groups in terms of use of paper and pencil or behavioural testing for selection. Implications of these findings for small organizations and future research in this area are discussed.

Introduction

Where human resource (HR) departments were once the dumping ground for those who where not capable performers (Sloan, 1983), they are now considered a means to developing a competitive advantage (Huselid, Jackson, & Schuler, 1997; Way & Thacker, 2001). Research has indicated that HR practices such as valid selection methods, compensation based on performance, and formal training, can have a significant impact on organizational performance (see Combs, Hall, & Liu, 2003). In recent years, small business has created the greatest number of net new jobs within – and has been a major component of the economic engine of – the North American economy (Way, 2002: 766). Therefore, any method that can engender competitive advantage within small business is important not only to these businesses but also to the entire North American economy (Way, 2002: 766). If, as noted above, valid selection methods, compensation based on performance, and formal training can have a significant effect on the bottom line, then it would be useful to determine the extent to which Canadian small businesses use these HR practices.

An examination of the previous research, which studied the HR practices of small businesses, provides mixed data. Some data suggests that there are clear differences in the selection practices that smaller businesses use. For example, Hornsby and Kuratko (1990), note that smaller businesses do not use aptitude testing to the degree of that of larger businesses. Deshpande and Golhar (1994) on the other hand indicate no difference in the use of written tests between small and large businesses. Some research has shown a common use of objective measures of performance (McEvoy, 1984) while other research has shown differences in use of different types of performance appraisals. Certainly one of the reasons for these differences is the nature of the questions asked. However, another reason for the difference might be the different definitions provided for a small business. Some researchers define small business as those with 250 employees or less (McEvoy, 1984) some as those with 150 employees or less (Hornsby & Kuratko, 1990) and some go as high as 500 employees (Flannagan & Deshpande, 1996; Deshpande & Golhar, 1994). Defining small as 500 or less could result in as much variance in HR practices within the sample of small organizations as between large and small. Consider the Hornsby and Kuratko (1990) study where they examined three levels of small business (1) 50 or fewer employees, (2) 51- 100 employees and (3) 101 - 150 employees. Even in the Hornsby and Kuratko (1990) study there were important differences between the three classifications they examined; and this study did not even consider organizations with 150 - 500 employees.

One method that may be useful in classifying small business is the formalization of the HR function. This is speculative, but it may not be the size of the organization specifically that causes changes in HR practices, but the hiring of a HR manager. At this point the HR function becomes a more formalized part of the organization, thus more important. The purpose of this paper is to examine the use of three HR practices and determine if having an HR manager results in more effective HR practices in these areas. The three HR practices are selection methods, compensation based on performance appraisal results, and formal training. Prior research indicates all of these are positively related to organizational performance (e.g., Combs et al., 2003; Cronshaw, 1986; Gerhart & Milkovich, 1992; Way, 2002; Youndt, Snell, Dean, & Lepak, 1996).

Selection methods

Use of valid selection methods can foster enhanced organizational performance (e.g., Combs et al., 2003; Cronshaw, 1991; Schmidt, Hunter, Outerbridge, & Trattner, 1986). Evidence indicates valid selection methods increase the chances that a selected employee has the ability to produce organizationally desired outputs (see Heneman, Schwab, Fossum, & Dyer, 1989) and enhance organizational performance (Way, 2002). Cronshaw (1986) reported the utility for a single year of testing in the clerical area of the Canadian Armed Forces was fifty million Canadian dollars. In the present study, we consider two dimensions of selection; (1) the interview and (2) testing; both paper and pencil and behavioural.

Compensation Based on Performance Appraisal Results

Effective performance appraisal (PA) may facilitate organizational performance in a number of ways (Bamberger & Meshoulam, 2000). The PA defines the behaviours and results that must be exhibited by employees for the success of strategy (Butler, Ferris, & Napier, 1991). PA can provide criterion measures for the validation of selection methods, the evaluation of training, a measure of needs assessment for training, and information for performance based compensation (Bamberger & Meshoulam, 2000). Gerhart and Milkovich (1992) reported a positive association between compensation based on PA results and organizational profitability. In this study, we consider the link between PA results and compensation, as research has suggested such a link leads to improved performance (Dreher, 1982; Vough, 1979).

Formal Training

On the job training is the preferred method of training in most small businesses (Blanchard & Thacker, 2004). However, in many instances it is very informal and as a result not effective (Suzik, 1999). A formal approach to training provides the opportunity for increased employee skills and behaviour repertoires (Way, 2002), which in turn, facilitates enhanced organizational efficiency (Cooke, 1994) and flexibility (Wright & Snell, 1998). Formal training can foster employee behaviours that focus on key business priorities dictated by strategy (Way & Thacker, 2001), and lead to organizational success (Becker, Huselid, Pickus, & Spratt, 1997; Blanchard & Thacker, 2004). In this study, we consider the extent to which formal training is provided.

Method

Subjects

Two hundred and two employees from the HR function within their various organizations participated in this survey. This represented a 22.1% response rate. These organizations had their headquarters in 9 of the 10 provinces in Canada; the greatest number of respondents came from Ontario (64.2%) and the least (none) from Prince Edward Island. Quebec had a lower response rate per capita than expected (2.6%). This was likely a function of not having a French version of the survey. Of the responding organizations: 40 percent reported they had less than 200 employees, 34 percent had between 201 and 1000 employees, and slightly over 25% had over 1000 employees. Respondents’ average tenure at their organization was 8.9 years. Fifty percent identified themselves as male and 49.5 percent as female (.5 percent did not answer the question). Regarding education, 28.4% indicated they possessed a Masters degree or better, 41.2% indicated they had a Bachelors degree, and 30.4% indicated they had less than a Bachelors degree. For those who reported having a minimum of a Bachelors degree, 44.6% indicated their discipline was management related (e.g. Management, Industrial Relations, I/O Psychology, etc.).

Procedure

A mailing list of companies across Canada, which provided the name of either the HR Manager, Vice President of Human Resources, President, or CEO of each company, was purchased from Dunn and Bradstreet. The list consisted of 1000 organizations that were randomly selected by Dunn and Bradstreet for our study. It included archival information, such as organization size, location, etc. Each survey was provided with an identification number so we could match the respondent’s information with the data provided by the database. Copies of the survey were mailed to each of the individuals on the list along with a cover letter signed by the authors, which asked that the survey be completed by the most knowledgeable HR person in the company and returned to the authors in the self-addressed envelope provided.

From our sample of 202 organizations, we choose two categories, labelled Group 1 and Group 2. Group 1 and 2 have 500 employees or less; and are further classified in that Group 1 has no HR manager and Group 2 has one HR manager. This represented 13 and 81 organizations respectively. The remaining 108 organizations (group 3) represented all organizations in the sample with more than 500 employees. Although not used in the data analysis, because it was not germane to the studies area of interest, this group will be referred to periodically in this paper where comparisons with large organizations are of interest. In the analysis for this study Chi2 was used as the test, for significance.

Results and Discussion

Selection Methods

The interview process. Regarding the interview process, all respondents reported using the interview for making selection decisions. The interview has received a great deal of negative reviews, based on academic research, regarding its reliability and validity (Arvey & Campion, 1982; Hunter & Hunter, 1984). Much of this research did not address the issue of the type of interview used, structured or unstructured. When structured, the interview has shown reasonable reliability and validity (Campion, Pursell, & Brown, 1988; Wiesner & Cronshaw, 1988). The present study indicates that the unstructured (less reliable) interview is used by the majority of small businesses without a HR manager (Group 1). This changes significantly (see table 1) once the small business has one HR manager (Group 2). Furthermore, the Behaviour Description Interview (BDI) is used more frequently by Group 2 than by Group 1. The BDI is the more current structured-interview approach, which has been shown to have incremental validity over cognitive tests and has equal validities for females and visible minorities (Pulakos & Schmidt, 1995).

INSERT TABLE 1 ABOUT HERE

Testing.We examined the use of two types of testing (1) paper and pencil, and (2) behavioural. The use of selection tests is fairly consistent between small businesses that do not have a HR manager and those that do. Interestingly, there is no difference between these two groups of small businesses, Groups 1 and 2, and Group 3 (the larger businesses) in either type of testing. Further analysis of our data revealed that the percentage of businesses that indicate they use one or more tests in conjunction with other information (interview) was consistent despite of the size of the business. This data confirms what Deshpande and Golhar (1994) found, that there is no difference between large and small organizations when it comes to the use of testing, and goes one step further by suggesting that the various methods of testing are relatively uniform across all these groups (includes large organizations).

Selection Process. First, it should be noted that about 60% of small businesses (with and without a HR manager) and larger businesses (Group 3) all use testing in their selection process. Therefore, the interview for the other 40% is a critical selection tool. In the small business where there is a HR manager, 80% use the structured interview. So, does having a HR manager make a difference to the sophistication of the selection process? Based on the data, the answer seems to be a qualified yes, at least where the interview is concerned. With no HR manager, most small businesses still use the unstructured interview. This seems to change once a HR manager is hired.

For the small business, effective selection methods are important. Richard Pinscher at the 1996 Small Business Forum indicated that for every three employees hired, one makes a solid contribution, one is marginal, and one should not have been hired in the first place (Spak, 1997). The cost for recruitment alone according to a survey done by the Employment Management Association conducted in 1994 was between 4500 and 5000 dollars (Spak, 1997). This does not include the cost of training and subsequent poor performance costs that result from a poor hiring decision. Clearly, more effective selection practices, which increase the likelihood of selecting a true positive, can save small businesses a great deal of time and money. Furthermore, the value of high performing employees adds value to the organization, and this translates to a better competitive edge.

Compensation Based on Performance Appraisal Results

As indicated by Table 2, Canadian small businesses are more likely to link PA results and compensation when a HR manager is present. Therefore, small organizations that employ a HR manager are more likely to capitalize from the advantages of linking PA results and compensation.

Linking pay to performance has clear benefits for all organizations. First, it can improve performance (Vough, 1979). Second, when rewards are tied to performance there is a positive psychological effect. It conveys to the high performers important information regarding their competence level and how they are regarded by their supervisor (Kopelman, 1986). Finally, pay for performance systems have a positive effect on turnover. In such systems it is the poor performers who voluntarily leave the organization (Kreher, 1982). This type of turnover is healthy for the organization.

According to a recent survey, one of the top HR challenges for Canadian organizations is to improve productivity (Brown, 2003). To remain competitive in a global economy, methods to improve productivity will need to be explored. Linking pay to performance is clearly a choice that has shown to be effective. Of course the majority of companies in Canada are small businesses, so this clearly applies to them. Moreover, the impacts of pay for performance systems are magnified in the small business, since each employee has more of an impact on the effectiveness of the business.

INSERT TABLE 2 ABOUT HERE

Formal Training

Table 3 suggests that Canadian small businesses are more likely to have formalized training programs in place when a HR manager is present. As noted earlier, most small businesses use the on the job training method (Blanchard & Thacker, 2004). This is often haphazard and informal, resulting in less than effective outcomes. When there is some level of formal training there is more assurance that the training for the job in question has been examined and relevant knowledge and skills determined. This should lead to more relevant training. Here again, for the small business, where each employee has a larger impact on the overall success of the business, more effective training leads to a more effective organization. From this research it seems clear that organizations that do not have a HR manager are less likely to take advantage of the increases in organizational performance that can be achieved through the implementation of formal employee training.

INSERT TABLE 3 ABOUT HERE

Study Conclusions

According to this study, having a HR manager resulted in important differences in the use of HR practices within small businesses. These differences have been shown to have the potential to improve the overall effectiveness of the organization (e.g., Combs et al., 2004; Way, 2002). However, the sample of organizations without a HR manager was small, so more research in this area is needed. The motive behind formalizing HR activities, by hiring a HR manager, is an area that may be of particular interest for future research. In the present study there was a great deal of variance between the size of the business and whether or not they have hired a HR manager – i.e., businesses with a few as 22 employees had an HR manager and businesses with as may as 300 employees did not have an HR manager. McEvoy (1984) indicated that a HR department was created (often with one employee) when an average of 73 employees was reached. The present study suggests a great deal of overlap; with some very small organizations having an HR manager and others being quite large and still not having an HR manager. What accounts for the decision to hire an HR manager? It does not seem to be size. Future research should investigate this issue.

References

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Bamberger, P., & Meshoulam, I. (2000). Human resource strategy: Formation, implementation, and impact. Thousand Oaks, CA: Sage Publications, Inc.

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Blanchard, P.N., & Thacker, J.W. (2004). Effective training: Systems, strategies, and practices (2nd Edition). Upper Saddle River, NJ: Person Education, Inc.

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Butler, J.E., Ferris, G.R., and Napier, N.K. (1991). Stratgy and human resource Management.Cincinnati: South-Western Publishing Co.

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Combs, J.G., Hall, A.T. and Liu, Y. (2004). High performance work practices and organizational performance: A meta-analysis. Working paper: January 2004, Florida State University.