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Department of Business and Management (MA)
2020-2021
Assignment Title:
“The Underpinning Theories of Human
Resource Management”
Instructor: Prof. George O. Tasie
Course: Advance Human Resource Management
Prepared by:
Shanaz Taha Ahmed (ID: 02-19-00091)
Dlvin Sabah Mahmood (ID: 02-19-00090)
Vala Moayad Abdullah (ID: 02-19-00095)
Submitted Date: 6th January 2020
Essay about answering the following question:
Discuss and argue the following underpinning theories of HRM:
1. Organization behavior theory
2. Motivation theory
3. AMO (Ability, Motivation, Opportunity) to participate
4. Human capital theory
5. Resources-based theory
6. Institutional theory
7. Transaction costs theory
8. Agency theory
9. Contingency theory
Page 2 of 21
Table of Contents
Chapter One: Introduction ............................................................................................ 4
Chapter Two: Conceptual Framework ......................................................................... 6
2.1 Underpinning Theories of HRM ................................................................................ 6
2.1.1 Organization behavior theory ................................................................................. 6
2.1.2 Motivation theory ................................................................................................... 7
2.1.3 AMO (Ability, Motivation, Opportunity) to participate .............................................. 8
2.1.4 Human capital theory .......................................................................................... 10
2.1.5 Resources-based theory ...................................................................................... 11
2.1.6 Institutional theory ................................................................................................ 12
2.1.7 Transaction costs theory ...................................................................................... 13
2.1.8 Agency theory ...................................................................................................... 14
2.1.9 Contingency theory .............................................................................................. 15
Chapter Three: Conclusion and Recommendation .................................................. 17
3.1 Conclusion .............................................................................................................. 17
3.2 Recommendation .................................................................................................... 18
References list ............................................................................................................. 19
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Chapter One: Introduction
Human resource management (HRM) is a critical field of study, well-recognized,
and high-value activity. HRM is the effective and efficient use of workers to accomplish
the organization's objectives, and it is about handling coworkers, being the human side
of business administration with strategies, practices, laws and processes that influence
the organization's workers (Arulrajah & Opatha, 2016, p. 153).
A theory is a collection of interrelated concepts, factors, interpretations and premises
which presents a systematic view of phenomena by defining the relationship between
variables in order to explain a natural phenomenon. There have been various reasons
why workers leave one company for another, based on some researches it shows that
many of these causes include recruiting practices, lack of a fair compensation scheme,
style of management, bad working conditions, job insecurity, dissatisfaction of job,
insufficient incentives for training and development. Such causes can usually be
categorized as motivational factors that are intrinsic and extrinsic. Management must not
rely completely on intrinsic variables to affect employee retention when evaluating an
effective strategy to keep an employee in an organization; instead, it must include both
extrinsic and intrinsic variables (Almaaitah et al., 2017, p. 21). The main reason of
retention is to keep the employees and prevent their leaving as this could have an adverse
effect on productivity and profitability (Samuel & Chipunza, 2009, p. 411). Employees in
any organizational firms always need a reward or any compensation to be motivated and
to be able to perform well, so that organizations should be able to set a comfortable
environment for their workers (Almaaitah et al., 2017, p. 25).
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On the other hand, the theories of management are the collection of general rules
which guide managers in managing an organization. Theories are also a justification for
encouraging workers by responding effectively to business goals and to incorporate
successful means of achieving the same. Management theories are principles around
proposed management strategies that may include methods such as structures and
guidelines that can be applied in modern organizations. Professionals usually will not rely
solely on one management theory, but will instead incorporate multiple principles from
various management theories that best match their employees and corporate culture.
This paper will discuss the main theories that underpinning on the HRM and its functions
in any organization.
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Chapter Two: Conceptual Framework
2.1 Underpinning Theories of HRM
Many researchers attempted to design a name for the HRM theories, this section
describes nine important theories which support HRM policy and practices in any
organization.
2.1.1 Organization Behavior Theory
The study of organizational behavior (OB) is applied to HRM functions and its
related subjects helps us understand what people in organizational environments think,
feel and do. This knowledge helps to anticipate, recognize and monitor organizational
events for HR and, realistically all employees. Organizational behavior study includes
research areas dedicated to improving performance at work, increasing job stability,
fostering creativity, and fostering leadership. A focus on organizational behavior helps to
explain why certain different behaviors impact workers ' efficiency and discretionary effort,
as well as how to consider and forecast the effects of different policies on managing
human resources (Pfeffer, 2007, p.126-127).
There are several important aspects from the viewpoint of organizational behavior that
Pfeffer in (2007) illustrated three: First, people are social beings and as such are
concerned with their interactions with one another and affected by what others say and
do. Secondly, people are worried with equality and justice, both the distributive results
and the mechanisms by which those results are decided. Because of this equal role in
both systems and results, people will be gradually known as economists, in reality, spend
money to "punish" people who violate fairness standards. Thirdly, organizations as
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entities are also embedded in a social context and are influenced and imitated by the
other organizations, partly in order to achieve validity by acting like or look like others and
partly in accordance with social expectations and standards.
So, organizational behavior is an area of study that examines the impact those human
beings, groups and structures have on behavior within organizations in order to apply this
knowledge to improve the effectiveness of an organization.
2.1.2 Motivation Theory
Motivation is a way to create a high amount of passion in order to achieve
organizational goals, and this condition is addressed by fulfilling certain individual needs.
As Haque, Haque and Islam (2014) stated that managers within businesses or
organizations are largely responsible for ensuring that the activities or roles are conducted
in the right way by workers. To accomplish that, these HRM must guarantee that they
have a professional team of workers to hire the best staff capable of doing the job. To
optimize the productivity of the employees, the employee needs to be motivated enough.
At this level, one must understand human nature better understand how motivation can
impact on the performance of the employee. To achieve this goal, it is important to
combine the correct motivational resources with successful management and leadership
in as much as motivation impacts on employee performance (Haque, Haque & Islam,
2014).
Not to ignore the idea that motivation is quite important in determining the skill of
the employee, so do other variables like the resources provided to an employee to do
their job. Successful work output may therefore emerge from a variety of motives. It
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provides an ambiguity in the discussion as performance and motivation varies from
individual to individual and from industry to industry. This therefore gives rise to more
critical analytical thought in the subject area. In this context, several academic literatures
from scholars and practitioners have ensured that this fascinating academic area can be
resolved on how motivation can improve performance (Haque, Haque & Islam, 2014).
Observations indicate that workers who are well motivated are more productive and
creative in achieving business or organizational goals. On the other hand, less motivated
workers are less productive and appear to deviate from the accomplishment of
organizational goals. Motivation as incentive programs is essential for capacity building
and capacity translation into higher performance (William, 2010, p. 2).
2.1.3 AMO theory (Ability, motivation and opportunity) to participate
According to AMO theory the components of Ability, Motivation, and Opportunity
are the three-independent work-system elements that form employee characteristics and
eventually lead to organizational success. Through these three components,
organizational interests are best served due to the fact that AMO theory paves the way
for line managers to use effective approaches that result in employee motivation using
HR policies and practices (Bos-Nehles, Riemsdijk, & Looise, 2013, p. 3). Firstly, Ability
refers to those practices and policies that HR undertakes to ensure that employees have
or gain the required skills, knowledge and ability to perform their tasks with minimum
supervision as Yahya, Tan and Tay (2017) states that ability-enhancing HRM practices
are the practices that increase the employee’s abilities and competencies to achieve
organizational goals. On the other hand, ability enhancing practices also refer to those
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practices that are taken to ensure effective recruitment and selection process to hire the
right employees who have the right skills for the role requirements. In addition to
recruitment and selection ability-enhancing HRM practices cover training and
development practices as well, which provide employees with the necessary skills and
knowledge to perform tasks )Yahya, Tan & Tay, 2017, p. 549).
Secondly, motivation refers to employee performance, amendment polices
performed by HR to manage motivation in the organization. It also refers to the ways in
which the employees are motivated to put more and extra efforts in performing assigned
tasks mainly by rewarding them for the efforts they have already put in their jobs
“motivation enhancing HRM practice within the organizations to perform better which
included contingent rewards and performance management” (Yahya, Tan & Tay, 2017,
p. 540). Motivation enhancing practices can be performed in different forms, for example
an organization can increase motivation through communicating performance feedback
to their employees or through providing them with financial rewards.
The last component is the opportunity-enhancing HRM practices which aim at
engaging employee involvement through providing opportunities. According to BelloPintado (2015) cited in Yahya, Tan, & Tay, 2017, p. 550) opportunities-enhancing HRM
practices are referred to as the practices that delegate decision making authority and
responsibility from top level hierarchy to lower level hierarchy through information sharing.
This practice strengths employee trust in the organization and it fastens organization
growth through collective work (Bos-Nehles, Riemsdijk, & Looise, 2013).
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2.1.4 Human Capital Theory:
Human capital is an illustration of people’s investment in themselves, in other word
in their skills, that eventually increases their economic productivity. Their theory is based
on the idea that human capital leads to creativity which eventually results in receiving
higher personal income. This theory’s supporters believe that educated people are
productive people meaning people who are educated, earn higher personal income than
the rest of the population. “Human capital theory rests on the assumption that formal
education is highly instrumental and even necessary to increase production capacity of a
population” (Olanyan & Okemakinde, 2008, p. 479).
However, there are some researchers who stand against the human capital theory,
such as Fix, Blair (2018) they suggest that the correlation between income and education
is weak. “Simple correlations between earnings and years of schooling are quite weak.
Moreover, in multiple regressions when variables correlated with schooling are added,
the regression coefficient of schooling is very small” (Mincer, 1974 stated in Fix, 2018, p.
21).
Human capital theorists claim that productivity and efficiency of employees
increases by education through raising the level of cognitive stock of economically
productive human ability that is an outcome of innate capability and investment in human
beings. According to Babalola (2003) stated in Olanyan and Okemakinde (2008) the logic
behind investing in human capital is built on three points of view which are first, the new
generation must be provided with the knowledge that previous generations also had.
Second, the new generation should be trained in the ways in which the existing knowledge
can be used to develop and invent different products or social services. Third, the new
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generation should be encouraged to discover entirely new approaches in fulfilling the
community’s needs through creative approaches.
2.1.5 Resource-based Theory
The resource-based view is applied as a theoretical foundation in HRM that is based
on the assumptions that firm resource distributed heterogeneously and remained stable
over time. A firm’s resources include materials, skills, organizational processes and
systems, plus information and data of the organization. This theory ties HRM with
competitive advantage generation through focusing on fostering the internal resources
that the organization owns which most probably are unique and special to the firm, in
different words no two organizations have the same exact resources, either tangible or
intangible. “If resources and capabilities of a firm are mixed and deployed in a proper way,
they can create competitive advantage for the firm. Eventually, only companies
themselves can achieve and sustain competitive advantage by innovation and
strategically positioning in the market” (Mweru & Muya, 2015, p. 217). However, theorists
argue that effective human resource practices can easily be copied by other competitors
while the type human capital an organization has cannot be copied which ultimately turns
into competitive advantage for the firm.
Theorists distinguish between resources and capabilities arguing that sources are
the inputs in the production process that are the fundamentals of analysis. According to
Grant (1999) researchers face some problems in identifying the resource basis for
specific organizations due to the fact that the two main sources of data and information
which are IT and financial statements and both of those factors fail to provide adequate
information about intangible resources and people-based skills and only provide a
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fragmented picture of resource bases. In order to find a tactic to identify resources a
classification approach is produced that consist of six categories of resources which are
financial resources, physical resources, human resources, technological resources,
reputation and organizational resources.
2.1.6 Institution theory
Institution theory suggests that the environment inside the organization has a direct
impact on formal organizational structure development. The organizational environment
features such as cultural elements, symbols, normative beliefs, and other shape
institutional structure. According to Meyer and Rowan (1977) cited in Mohamed (2017)
argued that organizational forms depend on “rational myths‟ or shared beliefs. Through
the Institutional theory theorists explain the logic of organizational fields and
organizational norms and argue that after conforming these norms, organizations become
optimal and prolong their survival by putting these norms into practice finally grantees
organizational survival.
However, one of institutional theory’s main contributions is managing the
organizational research in its cultural cognitive dimension (Scott, 2008 cited in Mohamed,
2017), researchers have focused on regulatory and normative aspects (Phillips and
Malhotra, 2008 cited in Mohamed, 2017, p. 152) that create stability by allowing deviating
behavior in the organizations.
It is argued that there are three different institutionalisms. Starting with sociological
intuitionalism which has three main stages. Firstly, instruments that consist of individual
ideas and assumptions. Secondly, the linkage between observed reality and political
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instruments and policy goals. Thirdly, culturally driven assumptions. The second form of
intuitionalism is historical institutionalism which has a moderately high level of self-identity
(Ramsey & Amenta, 2009, p. 3). The last element is political institutionalists typically
situate their claims at the state or macro-political level and argue that the process of
formation of states, political systems, and political party systems strongly influence
political processes and outcomes.
2.1.7 Transaction Cost Theory
Transaction cost theory is one of the important organizational theories for the
analysis strategy and organizational issue and recently it has been applied to the HRM
functions for controlling employee’s behavior, which focuses on examining the problem
of human exchange (contract) based on finance and economics. For the HR department
this theory is about understanding the employee’s contract (Wright & McMahan, 1992, p.
308). Transaction cost theory is used for solving opportunism and rationality in the
contract. Firstly, Opportunism means a contract between parties behave as self- interest,
a firm must provide safeguards in the contract as guarantee to be sure that the parties
will not tend to act in self-interest. Secondly, rationality means that the contract has no
enough information and disable company to make the right decision because the lack of
adequate information (Williamson, 1994, P. 81).
However, As Suska (2016) mentioned that the transaction cost divided into three
types; Marking transaction costs are the costs of collecting information, conducting
decision making about an agreement, and the cost of implementation of the contract. The
inter-company transaction costs are the fixed and the variable costs of the company’s
practices. The last one is public transaction costs, which are the costs of organizing and
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maintaining public order. Therefore, firms through marking transaction cost can reduce
the cost of searching for the qualified applicant by providing enough information about the
vacancies, checking the application documents, references, and negotiation about
contracts (Suska, 2016, p. 259).
Transaction cost theory is quite useful for describing employee motivation at the
individual, group and organizational level. The theory linked to compensation system and
provide adequate rewards for employee’s performance (Jones, 1984 quoted in Wright &
McMahan, 1992, p. 309- 310). Also, the transaction cost theory helps to arise the contract
implementation if any gaps, errors, unanticipated disturbances occurred between the
parties.
2.1.8 Agency Theory
Agency theory uses to understand situations in which a principal (owner) delegate
tasks to an agent (employees) on his behalf include some decision-making authority. This
theory applied to HRM by reducing the conflicts of interest between principal and agents
when responsibility delegated by controlling behaviors and build employee relations. As
Welbourne and Cyr (1996) noted that agency cost will reduce when the firm is controlled
by the owner and conflict of interest eliminated and establish proper incentives to ensure
that the agent will not take harmful action toward principal. Agency cost includes
monitoring cost which directly related to the actions of the agent. Firms managing and
monitoring by owner required low agency cost, but when the firm grows and more agents
involve, the monitoring cost increase because owner becomes less efficient.
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Nevertheless, the agency theory has extensive consequences at both the individual
and organizational level for firms, because it linked between goals and participation, tied
employee attitudes, organize the relationship between employer and employees, and
employee withdraws behaviors (Levy and Williams, 2004 quoted in Evans & Tourish,
2016, p. 6). Also, Welbourne and Cyr mentioned in their article that, the HRM functions
such as job analysis, job posting, writing and formalizing policy which made for the
purpose of standardizing and control employee behavior may viewed as serving
monitoring function by managers. Firms can get benefit from choosing incentive
alignment by increasing employee ownership (Welbourne and Cyr, 1996, p. 8). This
focusing on aligning employee goals with organization goals and makes employee
become risk-taker and behave in the interest of the principal benefit. Also, provide
rewards to employees when performance improved.
2.1.9 Contingency Theory
This theory suggested that in order firms to be effective, HRM functions must fit
with the organization or external environment aspects to achieve organizational goals.
According to Harney (2016) said that contingency theory within HRM is based on external
and internal fit. External fit means HR practices must fit with the organizational strategy
and environment conditions. Internal fits mean HR practices must work together to deliver
the same message and the desired outcome. Also, Delery and Doty (1996) stated that by
using contingency theory, firms can promote employee behaviors that are matched with
business strategy because behavior is the impact of an employee’s ability and motivation,
therefore by implementing HR practices such as promoting policies which motivate the
employee, an organization can influence behavior.
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However, contingency factors such as culture, globalization and the size of
companies have a direct influence over the HRM functions. According to Rekers (2013,
p. 25- 27) stated that as different culture implies different HR practices, when the
organization involved in a new environment which the culture is different form exist
culture, the HRM need more information to make decision, take care of changes and
maintain balance between employee’s behavior toward new environment. Globalization
is a contingent upon HR practices because the consequences of the globalization are
introducing firms to new technology, which required more training for employee and hiring
skilled labor and globalization lead to new markets which introduce to new cultures and
managing these different become very important for the HR department. Also, company
size is contingent upon HRM, because on the smaller firms, the HR department was not
existing or very small and sometime the responsibility takes by production manager while
in larger firms have a separate HR department which available for more issue and
required more HR expertise for being responsive.
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Chapter Three: Conclusion and Recommendation
3.1 Conclusion
In conclusion, HRM is the ability to use employee’s effectively and efficiency to
achieve the organization’s goal and HRM theories helps HR to achieve this purpose and
increase the motivation and commitment of workers. In this paper discussed nine theories
which support HRM functions. The organizational behavior theory helps HRM to
understand of employee’s behavior and explain why certain different behaviors impact
employee’s performance. Motivation theory is about creating a high amount of passion
between employees to obtain the desire goals and address individual needs. The AMO
theory paves the way for line managers to use effective approaches that result in
employee motivation using HR policies and practices. Human capital theory claim that
employee education is a key important point for raising productivity. The resource-based
theory is about HRM must know about the company’s sources and capabilities that can
be used for competitive advantage. Institution theory helps HRM to anticipate about
environmental dimensions that has direct impact over organizational structure
development. The transaction costs theory focuses on examining the problem of human
exchange based on finance and economics. The agency theory is important for HRM for
solving the conflict between principal and agents. The last theory, contingency theory
focuses of HRM functions must fit with the organization or external environment aspects
to achieve organizational goals.
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3.2 Recommendation
The strategies and practices of HRM as well as its role inside the organization
are very important. But the HRM function in one organization can be applied to the
others because the differences in organizational structure and its environment. It
is important for organizations to establish best HRM practices and policies which
facilitate continuous learning process for employees and provide a flexible
environment. The success of any organization depends on the ability to learn and
the employee’s ability to achieve designed goal. The HR must understand which
theory is needed for organization development. However, human resources
management should minimize the gaps in employment relationship, monitoring,
contracts and ensuring compliance in order to motivate employees.
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