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 Chinese University 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: sean@baf.msmail.cuhk.edu.hk
James W. Thacker
University of Windsor
Faculty of Business Administration
401 Sunset Avenue
Windsor, ON
N9B 3P4
Telephone: (519) 253-4232 Extension 3144
Email: jwt@uwindsor.ca
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
1
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.
2
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
3
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, &
4
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
5
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
6
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)
7
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
8
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.
9
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
10
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
11
should investigate this issue.
12
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TABLE 1
A Comparison of Small Businesses that have an HR manager with those that do
not have an HR manager in terms of the Interview method used
Structure of Interview
No HR Manager (n=13)
One HR Manager (n=81)
Unstructured
61.5%
19.8%
Structured
30.8%
53.1%
BDI
10.51, p< .05
7.7%
27.2%
2=
Chi
TABLE 2
A Comparison of Small Businesses that have an HR manager with those that do
not have an HR manager in terms of having a link between pay and performance
PA Linked to Wages
No HR Manager (n=13)
One HR Manager (n=81)
No
69.2%
42.0%
Yes
30.8%
58.0%
Chi2 = 3.35, p. <.10
TABLE 3
A Comparison of Small Businesses that have an HR manager with those that do not have
an HR manager in terms of having formalized training
Formalized Training
No HR Manager (n=13)
One HR Manager (n=81)
No
69.2%
30.9%
Yes
30.8%
69.1%
Chi2 = 7.14 p<.05
17