PERFORMANCE, HR PRACTICES AND THE HR MANAGER IN SMALL, ENTREPRENEURIAL FIRMS
Gerry Kerr
Odette School of Business
University of Windsor
Sean A. Way
Faculty of Business Administration
The Chinese University of Hong Kong
James Thacker
Odette School of Business
University of Windsor
Proceedings of the Administrative Science Association of Canada, June 5-8; Quebec City, Quebec.
Currently under review at the JSB&E
Also under review:
Kerr, G., Way, S.A. Thacker, JW (in press) Performance, HR practices and the HR manager of
small entrepreneurial firms.
Journal of Small Business Management and Entrepreneurship
1
PERFORMANCE, HR PRACTICES AND THE HR MANAGER IN SMALL, ENTREPRENEURIAL FIRMS
Research indicating a positive relationship between effective HR activities (a high
performance work system (HPWS)) and performance has focused primarily on large
organizations. The present study provides evidence that the relationship also holds for
small firms. As well, the presence of an HR manager is related to having a HPWS.
Differences between our findings and similar research are also discussed.
Introduction and Review of the Literature
There is considerable evidence that effective human resources (HR) practices improve
performance and provide organizations with a competitive advantage (e.g., Becker & Gerhart, 1996). The
extant research, however, was almost always conducted on large organizations, leaving suspect the
generalizability of the findings to small firms. Although these organizations are vital to an economy, smallfirm research is limited, in spite of the many calls for such a focus (Heneman & Berkley, 1999; Good, 1998;
Hornsby & Kuratko, 1990). More attention needs to be focused on the HR activities and outcomes of small
firms, with resulting information provided to those involved in these organizations (Heneman, Tansky &
Camp, 2000).
The first issue for consideration is defining the key focus, the small firm.
Historically, when
research on the small firm has been conducted, the definition of the entity has varied markedly. For
example, McEvor (1984) defined small business as those with 250 employees or fewer, Hornsby & Kuratko,
(1990) as those with 150 employees or fewer, and Flannagan & Deshpande, (1996) as organizations with
500 employees or fewer. But, defining "small" as 500 or fewer could result in as much variance in HR
practices within the sample of small organizations as between large and small. For example, Hornsby and
Kuratko (1990) examined three levels of small business (1) 50 or fewer employees, (2) 51- 100 employees
and (3) 101 - 150 employees. The authors found important differences between the three classifications they
examined; furthermore, the study did not even consider organizations with 150 - 500 employees.
For Canadian organizations, the definition for small business is generally accepted as fewer than 100
employees. Statistics Canada indicates that small firms (defined as 100 or fewer employees) make up about
98 percent of the Canadian economy (Industry Canada, 2003). Therefore, increasing the effectiveness of
small, entrepreneurial firms through relevant research is important.
There has been some help in that regard. Wager & Ross (1998) examined recruitment, performance
appraisal and workplace practices in small businesses in Eastern Canada. The authors noted a tendency for
firms to have more effective HR practices as size increased, especially if there was an HR expert in the
organization. In other work, using the organizations from the same region, Wager and Hammock (2000b)
2
reported only 28 percent of small businesses had formal training in place. The authors also noted formal
training was related to the size of the organization: almost 57 percent of organizations with 25 or more
employees had instituted formal training. Finally, Wager & Hammock (2000a) indicated that 43 percent of
surveyed firms had formal performance appraisal systems, 61 percent had some sort of incentive program
tied to productivity, and 56 percent used a bonus system for high performers. In a study of small United
States businesses, (between 20 and 100 employees) Way (2002) noted that high performance work
systems were correlated with turnover and perceived productivity. As well, the author noted the measure of
perceived productivity was problematic given it was a single item regarding performance of the workforce, a
complex outcome.
We focus our study on three areas. First, the relationship between HR practices and performance
will be examined. We have a more representative sample than the Way (2002) study, with a number of
firms containing fewer than 20 employees. We also have a more comprehensive measure of firm
performance. So, this study offers the promise of more detailed and reliable evidence of a relationship
between HR practices and firm performance, if one exists. Second, we will examine the role of the HR
manager in the development of effective HR practices. Understanding the relationship between having an
HR manager and firm performance and the reasons for deciding to have an HR manager are potentially
important issues related to firm effectiveness. Finally, we will examine our sample as it relates to the
findings of Wager and others noted above. The use in the studies of a single-location sample and the large
number of very small organizations (with fewer than 10 employees) casts doubt on the generalizability of the
findings.
High Performance Work Systems and Firm Performance
The implementation of a number of effective human resource practices in an organization provides
what is called a High Performance Work Systems (HPWS). These HPWS's are positively associated with
subjective (Delaney & Huselid, 1996) and objective (Guthrie, 2001) indicators of performance. HPWS's are
conceptualized as a set of distinct but interrelated HRM practices that together select, develop, retain, and
motivate a workforce in a competitively superior manner. In larger organizations, HPWS's are correlated
with a variety of measures of performance (Becker & Huselid, 1998; Guthrie, 2001; Huselid, 1995; Way,
2002). These findings lead us to state hypothesis one:
H1: There is a positive relationship between small-firm performance and the degree to which the
firm has an HPWS.
High Performance Work Systems and the Role of the HR Manager
3
Within the small business sector, gaining access to a workforce that produces superior employee
output is key to firm success (Deshpande & Golhar, 1994; Golhar & Deshpande, 1997; Holt, 1993; Hornsby
& Kuratko, 1990; McEvoy, 1984) and offers a source of sustainable competitive advantage (Flanagan &
Deshpande, 1996). Wager and Ross (1998) noted that small firms with an expert in HR resulted in more
effective HR practices. Thus, having an HR manager in charge of HR issues would likely result in more
effective HR practices, because he or she would have the time and understanding necessary to set up such
systems. The findings lead us to state hypothesis two:
H2: Small firms that have an HR manager will have a more advanced HPWS than firms that do not
have an HR manager.
Firm Size and HR Management
Generally, the size of the organization could be expected to influence the formalization of the HR
function. Wager and Ross (1998) reported the significantly higher presence of HR managers in larger firms.
The authors noted that having an HR expert and the institution of better HR practices was related to the size
of the firm. The findings lead us to state hypothesis three:
H3: There is a positive relationship between the small firm size and the presence of an HR
manager.
Finally, we will compare some of our findings with the few studies that have been conducted using
Canadian small businesses to determine the level of generalizability of the findings.
Methodology
Data Collection
A survey was administered to a group of small businesses, using a list purchased from Dunn &
Bradstreet. Businesses were contacted by telephone and the most knowledgeable person regarding
company practices (usually a top manager/owner) was requested. The survey was utilized to conduct an
interview that generally required about 20 minutes to complete. Results were obtained from 99
organizations, but one had to be removed as it had only provided demographic information. The result was a
20 percent response rate.
Measures
Firm performance. Firm performance is a multi-dimensional construct (e.g., Myer & Gupta, 1994;
Rogers & Wright, 1998), which is difficult to measure accurately. Furthermore, research suggests industryrelated factors influence the absolute financial outcome scores of a firm, and thus it may be misleading to
compare objective financial data across diverse industry settings (Covin & Sleven, 1989; Sapienza, Smith, &
4
Gannon, 1988).
To deal with the problem, some have suggested that firm performance should be
conceptualized (and measured) as the degree to which the firm is generating outcomes that are important to
the firm (necessary for the firm to attain firm goals and objectives). (See Gupta & Govandarajan, 1984;
Kaplan & Norton, 2000; Rogers & Wright, 1998; Steers, 1975; Way & Johnson, 2001). These "subjective"
measures of firm performance are closely correlated with objective measures (Dess & Robinson, 1984;
Robinson & Pearce, 1988; Venkatraman & Ramanujam, 1987). Moreover, objective measures are often
more difficult to obtain for small firms for the following reasons:




Thus,
managers of small firms usually exhibit high levels of secrecy, including great reluctance
in providing “hard” financial data (Litvak, 1976; Fiorito & LaForge, 1986),
the vast majority of small firms are privately held; thus, publicly disclosed financial data is
not available and it is not possible to check the accuracy of responses using filing data
(Covin & Sleven, 1989),
even assuming the accuracy of reported financial data, these data are difficult to interpret
because of the wide variety of business goals and practices in the small firm (Cooper,
1979), and
the effects of industry-related factors on absolute firm outcome scores can be such that
interpretation is misleading (Covin & Sleven, 1989; Sapienza et al., 1988).
a number of factors contributed to our decision to use subjective performance measures.
Their use seemed appropriate because respondents were a group of managers in small firms, whose
overview of organizational operations could be reasonably anticipated as secure, including their awareness
of success or goal achievement.
The construct of performance effectiveness was measured using a methodology similar to that
employed by Gupta and Govindarajan (1984), Colvin and Sleven (1989), and Miles et al. (2000). The
measure is obtained by first asking respondents to indicate, on a 5-point Likert-type scale, ranging from "of
little importance" to "extremely important”, the degree of importance their firm’s top managers attach to each
of the following firm outcomes: (1) sales level, (2) sales growth rate, (3) cash flow, (4) gross profit margin, (5)
net profit from operations, (6) profit-to-sales ratio, (7) ability to fund business growth from cash flow, (8)
return on investment, and (9) change in (a) the value of the firm (in private firms) or (b) share price (in public
firms).
Respondents are then asked to indicate on a 5-point Likert-type scale, ranging from "highly
dissatisfied" to "highly satisfied”, the extent to which their firm's top managers are satisfied with the firm's
performance with regard to each of the nine performance outcomes. Each of the nine "satisfaction" scores
is then multiplied by its corresponding "importance" score to create nine performance scores, which were
then added together to create the firm effectiveness measure. The resulting measure of firm performance
defines the degree to which the firm generates outcomes necessary for the attainment of a firm's broadbased goals and objectives.
5
High Performance Work Systems (HPWS). The methodology for measuring a HPWS is also
taken from previous research in HR (see Becker & Huselid, 1998; Combs, Hall & Liu, in press; Huselid,
1995; Way, 2002). Seven components make up the measure (see Table 1). All seven components were
assessed as they relate to two categories of employees, management/professional employees and nonmanagement employees. The process worked as follows. We first generated two additive HR systems
scores (the sum of the Z-scores of our HR systems’ seven components) for the two major categories of
employees. Next, the two HR scores were weighted by the proportion of employees in its corresponding
category (for example, non-management weighted HR score = (non-management HR score) * (number of
non-management employees / total number of employee)). Finally, the 2 weighted HR scores were then
added together to generate a unitary index, the high performance work systems measure. (Refer to Becker
and Huselid (1998) and Delery (1998) for comprehensive discussions regarding the strengths and
weaknesses of employing an additive approach to create a unitary index in HR systems research.)
Table 1
The Seven Components of the High Performance Work System (HPWS)
Component Label
Selection ratio
Definition/Measure
The number of qualified applicants that the firm’s recruitment process
generates per opening (on average) – five-point scale: 1 = 0, 2 = 1, 3
= 2 to 3, 4 = 4 to 8, and 5 = + 8 qualified applicants per position
Screening tests
The frequency in which screening tests (aptitude, work samples, etc.)
are used to assist in the selection process – six-point scale: 1 = 0, 2 =
up to 10, 3 = 11 to 30, 4 = 31 to 50, 5 = 51 to 75, and 6 = + 75 percent
of the time
Formal training
The average of (A) and (B): (A) the number of days of training that the
firm delivers to new hires in their first year – seven-point scale: 1 = 0, 2
= 0.5 or less, 3 = +0.5 to .999, 4 = 1 to 1.999, 5 = 2 to 2.999, 6 = 3 to
4.999, 7 = + 4.999 days. (B) the number of days of training that the
firm delivers to a typical employee (per year) after their first year –
seven-point scale: 1 = 0, 2 = 0.5 or less, 3 = +0.5 to .999, 4 = 1 to
1.999, 5 = 2 to 2.999, 6 = 3 to 4.999, 7 = + 4.999 days
Performance appraisal
The percent of employees who are regularly (i.e., at least annually)
assessed via a formal performance appraisal process – six-point
scale: 1 = 0, 2 = up to 10, 3 = 11 to 30, 4 = 31 to 50, 5 = 51 to 75, and
6 = + 75 percent of employees
Performance related pay
The percent of employees who receive merit increases or incentive
pay based on performance – six-point scale: 1 = 0, 2 = up to 10, 3 =
11 to 30, 4 = 31 to 50, 5 = 51 to 75, and 6 = + 75 percent of
employees
Compensation level
Communication
The level of employees’ total compensation – three-point scale: 1 =
below industry standard; 2 = around industry standard; 3 = above
industry standard
Frequent, accurate communication of firm “values” and “beliefs”,
derived from agreement with statement “Your firm frequently and
accurately communicates its culture to employees” (five-point scale): 1
6
= strongly disagree; 2 = disagree; 3 = neither disagree nor agree; 4 =
agree; 5 = strongly agree
Analysis
A correlation coefficient was computed to test hypothesis one. For hypothesis two, a correlation of
two dichotomous variables was computed. The process required dichotomizing the HPWS variable by
defining each data point as above and below zero. Scores above zero were defined as more advanced than
those below zero. To test hypothesis three, we created categories for organizational size similar to those
found in the Wager and Ross (1998) study. A correlation coefficient was then calculated.
Results
Demographics
Of the 98 respondents, 17% had fewer than 20 employees, 47% had between 20 and 39 employees,
21% had between 40 and 59 employees, 7% had between 60 and 79 employees and the remaining 7% had
80 to 99 employees. Ten percent of responding firms had revenues up to $100,000, 20% between $100 and
$200 thousand, 37% between $200 and $500 thousand, and 23% between $500 thousand and 1 million.
The remaining 10% had revenues above $1 million. Half of the companies returning surveys were from
Ontario, 14% from Alberta, and the remainder from the other provinces across Canada. The only province
not represented was New Brunswick.
The organizations represented a cross section of industries, with the most coming from sundry
manufacturing (29%) and service industries (28%). Five percent came from the finance area, 9% from
transportation, and 13% and 14% were focused on wholesale and retail industries, respectively. Nine
percent of our respondents were unionized.
Twelve of our reporting organizations (12.2% of total respondents) indicated they employed a Human
Resource Manager (HRM) to deal with HR issues for management and non- management membership.
Furthermore, only 5 of the 12 HRM's had some level of HR training, such as the provincial certificate or
community college/university degrees. Thus, the level of education did not seem to have an impact on the
HR procedures conducted in the organization.
Hypotheses
7
Hypothesis one was accepted. The relationship between high performance work systems and firm
effectiveness was significant (r = .184; p<.05, one tail test). Hypotheses two was also accepted (r = .179, p
< .05 one tail test)i. (Table 2 shows that of the 12 HR managers, 9 are in firms with HPWSs.)
Table 2
The Presence of the High Performance Work Systems (HPWS)
and Human Resources (HR) Managers
HR MANAGER
HIGH PERFORMANCE
No
Yes
Total
No
45
3
48
Yes
41
9
50
Total
86
12
98
WORK SYSTEM
However, hypothesis three was not supported (r = -.08; p> .05). Firm size did not significantly affect the
presence of an HR manager in responding firms.
The HR manager
No single issue determined a need for an HR manager. For the 12 organizations that had an HR
manager, four (33%) indicated his or her presence related to the growth or size of the organization, four
(33%) indicated the need to conform with various legal requirements, three required increased effectiveness,
and one indicated the amount of work required. This last issue may also be related to growth or conforming
to legal requirements.
Comparisons with other Canadian small business findings
Contrary to previous research, having an HR manager was not significantly related to the size of the
firm. Four of the firms with HR managers had fewer than 20 employees, three had between 20 and 39
workers, two had between 40 and 59 employees, one had between 60 and 79 workers, and two had
between 80 and 99 employees (see Table 3). However, there may be a trend related to type of industry
(see Table 4). The group of respondents in the finance area has the highest percent or HR managers, but
the total number of responding finance organizations is small. Of the two industry types with the highest
number of organizations in the sample, manufacturing has more than twice as many HR managers than the
firms in service industries.
i
A Fisher exact test with Tocher’s modification was also computed and was significant at the .05 level.
8
Table 3
Responsibility for Human Resources Activities*
FIRM SIZE
PERSON(S)
RESPONSIBLE FOR HR
ACTIVITIES
Under 20
employee
s
20-39
employees
40-59
employee
s
60-79
employee
s
Over 80
employee
s
Total
HR manager
4 (4)
3 (3)
2 (2)
1 (1)
2 (2)
12 (12)
Owner/Manager
2 (6)
12 (17)
5 (4)
1 (3)
0 (1)
20 (31)
One Manager
1 (2)
3 (9)
1 (5)
0 (1)
0 (0)
5 (17)
Respective Dept Heads
1 (2)
2 (10)
2 (5)
0 (1)
1 (2)
6 (20)
Team of Managers
2 (3)
1 (4)
1 (4)
1 (0)
1 (1)
6 (12)
Other
1 (0)
3 (2)
1 (1)
0 (0)
0 (0)
5 (3)
No one
6 (0)
23 (2)
9 (0)
4 (1)
3 (1)
44 (3)
Total
17 (17)
47 (47)
21 (21)
7 (7)
7 (7)
98 (98)
*The organizational count for the responsibilities for non-management employees is provided in brackets
Table 4
The Number of Human Resources Managers by Firm Type
Firm type
Number of
organizations
Number that have
HR manager
Percentage of
organizations
Manufacturing
29
5
17
Transportation
9
1
11
Wholesale
13
1
8
Retail
14
1
7
Finance
5
2
40
Service
28
2
7
Total
98
12
100
Most organizations had some level of formal training; only 17 percent indicated they did not (see
Table 5). Again, the amount of formal training for both management and non-management did not seem to
be a function of the size of the organization.
Table 5
9
Firms Providing Formal Training for Employees in Their First Year of Employment*
Number of training days in first year
Firm Size
None
½ day
or less
More
than ½
but less
than 1
day
Betwee
n 1 and
1.9 days
Betwee
n 2 and
2.9 days
Betwee
n 3 and
4.9 days
Five or
more
days
Total
Under 20
employees
6 (4)
2 (2)
1 (3)
2 (2)
1 (0)
1 (2)
4 (4)
17
20 – 39
employees
2 (3)
4 (8)
3 (3)
3 (4)
3 (4)
3 (4)
23 (21)
41
40- 59
6 (5)
4 (2)
3 (4)
2 (0)
2 (0)
1 (2)
8 (8)
26
60 – 79
employees
2 (0)
1 (3)
1 (1)
0 (0)
0 (0)
0 (1)
2 (1)
6
Over 80
employees
1 (1)
0 (1)
6 (0)
1 (1)
0 (0)
2 (1)
3 (3)
7
Total
17 (18)
11 (16)
14 (11)
8 (7)
6 (4)
7 (10)
40 (37)
98
employees
*The organizational count for non-management employees is provided in brackets
Examining industry type shows no strong pattern related to training, although finance seemed to be
the only group that provides some level of formal training in the first year for all management/professionals
and non-management employees (See table 6). We also inquired about the level of ongoing formal training
offered after the first year, and again financial firms were the only group that had some level of training for all
management/professionals and non-management employees.
In terms of formal performance appraisal, the majority of firms reported some level of regular formal
performance review of their management/professional employees and non-management employees (66%
and 65% respectively). Regarding incentives based on performance, 80% of the firms provided merit or
incentive pay to some of their management/professional employees and 74% provided merit or incentive
pay to some of their non-management employees. Of the 80% of organizations providing some form of
incentives to workers in the management/professional categories, 55% of these provided such incentives to
more than 75% of all management/professionals. By comparison, of the 74% of organizations providing
some for form of incentives to non-management employees, 53% provided incentives to more than 75% of
their non-management employees.
A small number of firms also provided opportunities for employee
ownership (18% for management/professionals and 7% for non-management employees).
Table 6
10
Firms by Type Providing Formal Training for Employees in Their First Year of Employment*
Number of training days in first year
Firm Size
None
½ day or
less
More
than ½
but less
than 1
day
Between
1 and 1.9
days
Between
2 and 2.9
days
Between
3 and 4.9
days
Five or
more
days
Total
Manufacturin
g
5 (4)
3 (6)
2 (1)
3 (3)
5 (2)
1 (1)
10 (12)
Transportatio
n
2 (2)
1 (1)
0 (1)
1 (0)
0 (0)
1 (1)
4 (4)
9 (9)
Wholesale
2 (2)
2 (3)
1 (1)
1 (0)
0 (0)
0 (3)
4 (4)
13 (13)
Retail
4 (2)
0 (1)
1 (1)
0 (1)
1 (1)
1 (0)
7 (8)
14 (14)
Finance
0 (0)
1 (1)
0 (0)
0 (0)
0 (0)
1 (1)
3 (3)
5 (5)
Service
5 (3)
4 (4)
4 (7)
3 (3)
0 (1)
3 (4)
9 (6)
28 (28)
18 (13)
11 (16)
8 (11)
8 (7)
6 (4)
7 (10)
40 (37)
98 (98)
Total
29 (29)
*The organizational count for non-management employees is included in brackets
Discussion and Directions for Future Research
Our research provides more evidence that HPWS's are strongly associated with superior firm
performance, even in small firms. Broadly, our results are good news to the small business owner/manager.
The conclusions show that concentrating on effective HR practices can help lead to a competitive
advantage.
The present paper extends Way (2002) in two significant directions. First, the performance measure
was more comprehensive than that utilized in the earlier study. Furthermore, the findings of Way (2002)
were supported, despite the changes. Second, our study included firms with fewer than 20 employees,
unlike Way (2002), which is an important sample segment for any study of small business.
There is also evidence that having an HR manager facilitates the development of an HPWS. High
performing work systems with HR managers were clearly in the majority. The results should encourage
small firms to consider not only obtaining HR managers, but providing them with the resources to embark on
the development of HPWS.
However, three HPWS's did not employ HR managers. A number of explanations seem plausible.
For example, it is likely that factors other than the presence of an HR manager are necessary for the
creation of an HPWS. Factors could include a number of issues, such as finances to support such systems
and the expertise of the HR manager in implementing such systems. As well, Wager and Ross (1998)
11
asked if there was an HR expert in their responding organizations, suggesting that the presence of expertise
may be more relevant than having an HR manager per se.
In general terms, more understanding of the precursors to an effective HPWS seems to be where
future research should focus, as the relationship between HPWS and firm performance seems to be as
relevant to small firms as large ones. As well, although we have partially explained the reasons small firms
decided to set up an HR manager position, unanswered questions remain. For instance, are some industries
more inclined to have HR managers than others, and if so why?
A number of differences are evident between the findings of our study and those of the extant
Canadian research. In our study, there was no significant relationship between firm size and the presence
of an HR expert (HR manager), the amount of formal training provided in organizations, or the use of a
formal performance appraisal. Also, many more of our responding firms reported the provision to employees
of at least some formal training than in previous research. Similarly, more firms returning our surveys utilized
incentive pay to encourage performance than in previous research.
In the most general terms, our findings provide evidence and impetus for the need for replication of
research. There is simply too little research on small firms to make any solid generalizations regarding the
findings. The differences from past research may be a function of temporal differences in the studies (4
years), regional differences, the nature of the survey questions, or sampling issues (related to the small
sizes of the study samples). This last issue is relevant especially for the present study, which purports to
represent firms from across Canada.
More research is also needed to better understand the differences in firms that are a function of
organizational size. The vast amount of literature available to the larger organization, if generalizable to
small firms, would be very useful in future planning. But, the relationship is not sufficiently clear.
We must convince the owners and/or managers of small firms of the advantages of taking part in
studies. Active researchers are doubtlessly aware of the difficulties of enticing small business officials to
become involved in research, diminishing interest for those not active in the field (Heneman et. al. 2000).
Hopefully the relationship of research and practice will evolve and grow, despite the challenges, because its
importance to the Canadian economy is undeniable.
Limitations
As stated, the sample size for this study is small, putting validity and reliability into question.
Although respondent data includes a cross-section of Canadian firms, the numbers are modest for many
provinces, and some industries are underrepresented. Furthermore, we were challenged when convincing
12
the managers of small firms to be surveyed. This is obviously a crucial step in being able to gather data for
research. But, perhaps equally important is the fact that small sample size precludes the use of more
complex analytical techniques, such as the use of structural equation modeling, to assess causality. Until
such modeling can be undertaken, causality will remain an open question.
Some might also argue the criterion measure is not appropriate and that response bias might be
affecting the findings. However, the measure of firm effectiveness we employed is not a simple, one-item
question related to the firms' effectiveness, but is instead a set of relevant variables measured at two levels,
importance and satisfaction. The variance created by the performance variable alone suggests the presence
of meaningful information. But, perhaps more convincing are the correlations with other variables in the
study. An examination of the correlations seems to demonstrate convergent and discriminant validity
(Campbell and Fiske, 1959; Cook & Campbell, 1979). Certainly, more research using larger samples will be
welcomed.
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