DISSERTATION CHAPTER 2 - HRM POLICIES AND PRACTICES: CASE STUDY OF THREE SMALL MEDIUM ENTERPRISES (SMEs)
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Chapter 2 LITERATURE REVIEW
The choice of literature for this study is limited only to those that have a vital contribution about HRM in SMEs. This chapter reviews articles from books and journals on HRM and SMEs. Specifically, this chapter discusses HRM and the HR model specifically designed for this study as well as the SMEs and SMEs in the UK. However, the chapter focuses on HR problems as experienced by the SMEs and HR policies and practices in SMEs.
Human resource management HRM is a strategic, integrated and coherent approach to the employment, development and well being of the people working in organizations (Armstrong 2009 pg4). The overall purpose of HRM in organizations is to ensure that they are able to achieve success through people and aim to increase the effectiveness and capability of an organization by achieving goals through making the best use of resources available to them (Armstrong 2009). Other policy goal as described by Caldwell (2004) indicate that managing people as assets are fundamental to the competitive advantage of the organization.
As stated by (Armstrong 2009 pg11) HRM systems bring together HR philosophies which are seen describe the overarching values and guiding principles adopted in managing people, HR strategies which are used to define the direction in which HRM intends to go, HR policies that assist in providing guidelines defining how these values, principles and the strategies should be applied and implemented in specific areas of HRM, HR processes that consist of the formal procedures and methods used to put HR strategic plans and policies into effect, he also linked HR practices that consist of the approaches used in managing people, and HR programmes that enable HR strategies, policies and practices to be implemented according to plan.
For this study, an HR model is specifically designed to cater to the focuses of the study which are: learning and development, people resourcing and reward management. Basically, organizations are becoming more particular with organizational learning and therefore collective development. Easterby-Smith et al (1999) stated that organizational learning and development is one of the imperatives of human resource management since it centers improving performance at individual, collegiate and organizational levels. As such, the acquisition of understanding, know-how, techniques and practices are translated into organizational resource through the people that acquire, infer and utilize these intellectual intangibles toward the achievement of organization-wide learning and development (Armstrong, 2006, p. 40).
Armstrong (2005, p. 359-360) defines people resourcing as “concerned with ensuring that the organization obtains and retains the human capital it needs and employs them productively.” Also, as a key part of the HRM process, people resourcing concerns with the aspect of employment practice of welcoming people to the organization and their relative exit. HRM aims at the strategic fit of the human resources to the operational needs of the people. Hence, people resourcing is about thinking about the competencies required for the future to achieve sustainable growth. There are two fundamental questions to ask: 1) what kind of people do we need to compete effectively, now and in the foreseeable future? 2) what do we have to do to attract, develop and keep these people?
In terms of reward management, Deb (2005, p. 132) noted that the reward system is comprised of financial rewards such as base salary, pay incentives and employee benefits and non-financial rewards which include intrinsic rewards and praises, recognitions and time off among others. Deb (2005) claims that as it is consistent with other HR systems reward management is also perceived to be a key driver for HR strategy, business strategy and organizational culture. As such, reward management function of HR is directly linked to employee performance, productivity and outputs.
Figure SEQ Figure \* ARABIC 1 Three-Function Model
Human resource policies and practices are normally thought of as a large organization preoccupation and tend to bypass small firms which have also been neglected in academic literature, as was evident in (Sparrow & Cooper, 2003). Very little has been documented about SMEs although some information was available in human resource management surveys such as WERS 2004. Nevertheless, the early studies assumed that small companies operate on a familial basis and had minimal human resource issues because everybody seems to understand the direction that the business is trying to pursue considering the small number of people. These issues have been the subject of intense policy debate and speculation for a number of reasons and make it challenging for small firms to incorporate cost effective and efficient HR practice and policy.
As we all now know, undercapitalization is one factor that hinders the growth of SMEs more unfortunate on those who have the potential to widen scale and scope in the future. However, innovation is crucial for competitiveness, market-orientation is also critical in achieving competitive edge, organizational and managerial approaches need to be effectively employed, alliances and partnerships should be created and involvement and motivation of the people working at the SMEs are also critical. All of these growth factors inherent to SMEs require a financial support. For instance, workforce needs to be upskilled through trainings and development initiatives, which is a core to HR practice and policy (Storey 1994).
The Department for Business, Innovation and Skills (BIS) defines small and medium enterprise as a company employing 0 – 50 staff. Based on the 2008 statistical information about SMEs in the UK, there were an estimated 4.8 million private sector enterprises at the start of 2008. There is a 2.2% increase since the start of 2007 and these levels are recorded as the highest since 1994. SMEs make up 99.9% of all enterprises with 59.4% of private sector employment and 50.1% of private sector turnover. Employment in SMEs is estimated to be at 13.7 million, 287,000 or 2.1% higher than that of 2007. Turnover in SMEs is estimated at £1,500 billion, £61 billion higher than 2007 records (BIS 2009).
Along with other British workplaces, the state of employment relations within SMEs could be unfavourable and poor performing. The 2004 Workplace Employment Relations Survey (WERS 2004) reveals the various dilemmas that SMEs are facing when it comes to employer-employee relationships. First is apparent on union presence wherein 93% of the management is not in favor of unionism. In the private sector where SMEs belong, 77% of the workplaces have no union members. This results in poor to non-existent of collective bargaining for employees. Only 11% of the private sector has any collective bargaining method while 15% of the workplaces in this sector hold individual negotiations.
Further, WERS 2004 noted that in the absence of a recognized union, the management tends to negotiate, consult or inform employees rather than arriving at joint regulations. Also, they only address either one of these items: pay, hours of work, holidays, pensions, staff selection, training, grievance procedure, disciplinary procedure, staffing plans, equal opportunities, health and safety and performance appraisal.
When it comes to equal opportunity practices, there are specifically no written policies and eventual monitoring and review methods concerning issues of gender (4%, monitor; 2%, review), ethnicity (3%, monitor; 2%, review), disability (5%, monitor; 3%, review) and age (12%, monitor; 4%, review). Therefore, equal opportunities policies and their related practices are relatively poor. This is more evident on private workplaces and workplaces without recognized unions at 67% and 63%, respectively.
While, this might be the case, it was found that employees were no more likely to rate managers as poor or very poor in consulting them about workplace changes. This is more so when it concerns job satisfaction and job-related well-being. The 12 issues identified above directly relate job satisfaction, for instance including sense of achievement, influence over job and involvement in decision making (WERS 2004). Pay, nevertheless, is the common source of dissatisfaction among the employees with (28%) of the workplaces. Hence, the indicators of a healthy employment relationship are mixed although employees in small businesses do have relatively high levels of job satisfaction. However, in conjunction with this, employees are more likely to find they are paid lower, which may increase applications for employment tribunals.
There are also numerous human resource problems that the small companies face. For example, various human resource focused surveys indicate that, as the recruitment process becomes increasingly demanding, small businesses will need to put more effort into staff selection and find new ways to manage their current employees. For SMEs, there are specific issues that HR faces including the necessity of having an HR department considering the size and structure of the business; the gaps in critical HR knowledge, expertise and competencies; the lack of resources (people, time and finance); the lack of focus on operational versus strategic activity and the general lack of with whom to benchmark HR policies and practices within the context. How threshold competencies will lead to excellence is another dilemma for SMEs.
According Taylor et al (2002) as many as half of the small firms were owned by families and 43% had a manager on site fulltime. The main characteristic seen on small firms is the fact that they are very informal when it comes to employee relations, a typical example is that there are very few policies and procedures and those that have them have very informal schemes as compared to large organizations. Evidence has shown that only 20% of these SMEs staff are union members and only half of that recognize trade unions (Taylor et al 2002). When we take into consideration that there is no trade union representation and the companies operate in an informal way then it is easy to state that the employees find it difficult to voice their concerns.
The CIPD are also advising small firms to invest more time and energy into their recruitment and selection process if they are to select the most suitable person for the job as related research revealed that 1 in 8 employees leave within the first six months (CIPD et al, 2000 – 2006). This further clarifies the point that recruitment and selection is the foundation of all other human resource activities.
Furthermore, according to the Institute of Directors (IoD, 2003), small firms are finding it difficult to cope with managing existing employees. The research also found that human resources accounted for approximately half of the UK’s small firm expenditure and that managers/owners were managing the human resource process directly within 55 per cent of businesses (IoD, 2003). This means they are spending approximately, up to one day a week resolving human resource issues.
In addition, are the discoveries that although, most companies believe their human resource policies are clear, 41 per cent admit to not having a formal recruitment policy. Other figures show that 67 per cent cite that keeping staff happy as their number one human resource priority, with 53 per cent finding this the hardest part of their job and even though 88 per cent of small businesses see recruitment (IoD, 2003) as a major challenge, 64 per cent prefer to keep human resource and recruitment in-house (charts detailing the above percentage figures can be observed at Appendix, Management of the HR process in small firms).
Further, evidence revealed that, unfortunately, government policy often excludes SMEs, including any special privileges or support provision which is needed in this regard. This is taken into consideration and wherever possible administration can be made simpler for employers by the use of HR professional groups, and consultants whose expertise can minimise additional burdens and aid with identifying and developing other changes to help business. Although, there is no evidence that documents whether small businesses are aware of, or use the professional expertise available to them (CIPD et al, 2001).
On a broader scale, specific problems are defining exactly what types of human resource policies and practices are available for the smaller firm and whether boundaries can be established (IRS Employment Review No 713, 2000). Fundamentally, effective HR practice and policy involves the employer and employee and are concerned with gaining workforce commitment to the achievement of the organisation, business goals and objectives, which can give the firm its competitive edge (Bratton & Gold, 2003).
As can be observed, HR practice and policy are pivotal issues and concerns for employers of small firms in the UK and are of immediate concern. For example, added pressures from the government and related organisations in this field that recognise that the UK still lags behind its European counterparts (although still ahead of the USA and Australia) who are consistently trying to persuade employers that it is in their best interests to voluntarily adopt new and improved policies. These policies should be implemented to suit the needs of the business and its employees and may help to reduce the need for further changes in legislation in the short term (Taylor, 2002).
Introducing human resource policies and procedures can give the smaller companies an opportunity to offer a fair and consistent approach to managing staff. Some policies and procedures will be relevant to all organisations as law requires them to be put in place but others are presented for the promotion of good practice and these are encouraged in the small business sector (CIPD, 2004). According to the Chartered Institute of Personnel and Development (CIPD), a small organisation should have a small selection of policies and procedures, which should be added to when the organisation grows or amended as and when necessary.
Therefore, to avoid this problem occurring, the human resource team function within SMEs must be a good judge of morale and realize when morale boosting incentives are needed. It is up to them to make sure all employees are comfortable with their surroundings and working under acceptable, if not above average, conditions. Moreover, are the additional concerns behind the need for HR practice and policy and these should also be taken into consideration as they can have a major impact on small firms. These concerns mean that the small business sector is no longer completely outside the market competition but instead subjected itself on a highly competitive environment which means that more aggressive people management policies and practices should be in place.
Further, it is important to note the economic significance surrounding the small business sector and how this has enhanced the importance of HR practice and policy and its relevancy to the smaller firm (DTI, 2005). For instance, this would be more apparent on the financial capacity of SMEs such that offering competitive benefits and compensation packages relative to the larger companies. HR practice and policy is essential but the degree to which it is used can vary dependent upon the size and nature of an organisation, though it must be noted that it is a necessity within all firms.