How HR can impact the bottom line

Companies often fail to adopt human resource practices that would improve financial performance. Here's why they should.

Is your company neglecting HR?

In today''s highly competitive corporate environment, chief executives are focused even more than in the past on shareholder value. Jeffrey Pfeiffer, a professor of organisational behaviour at Stanford Graduate School of Business, argues in the Journal of Economic Perspectives, that many companies are failing to adopt human resource management practices that research has shown would improve their financial performance. Research shows that how people are managed affects quality, profitability, productivity and total return to shareholders by increasing employee commitment.

Importance of employee commitment

Employee commitment surveys show that commitment arises from a combination of various factors, including: job satisfaction, recognition, appreciation from managers, remuneration, job challenges, job security, responsibilities and healthy competition etc.

Employee satisfaction is generally viewed as the employee''s feelings about their salary, working climate and the training opportunities offered to them for professional growth. Committed employees display:

• better performance in serving customers;
• willingness to accept new problems;
• high quality work performance; and
• desire to stay for long periods with the company.

The most striking aspect of committed employees is their values. They have high personal values which, not surprisingly, are quite similar to those of the company. They possess a sense of attachment with the company and care about its future and fortune. Committed workers feel proud to be a part of the company.

In his book Authentic Leadership, former Medtronic CEO Bill George makes an obvious point that business leaders rarely say out loud:  "Missions motivate, dollars don''t." What he means is that purpose is what drives employee commitment, not the financial rewards that come to others.  Employees don''t get up in the morning and say, "Gee, I can hardly wait to get to work today to maximise shareholder profits."  Even when employees are shareholders who can benefit from improved financials, what draws them to their chosen careers is the work itself and its purpose in the world. For most people, these factors are more important than the profit possibilities.

Improving employee commitment

Organisational behaviour experts agree that the following five key practices make a significant positive impact on employee commitment.

• Training to build skills and competence activates the basic human instinct of "reciprocity". If the company has invested in the employee, then the employee will feel some obligation to reciprocate that investment with greater effort and commitment.
• Sharing information so people can understand the business and have the data to make better judgements about what to do and how to do it. Sharing information with another party signifies trust, which is then likely to be reciprocated.
• Decentralised decision making and self-managed teams of trained and motivated employees who are able to influence decisions about work. Decentralising decisions to self-managed teams engages the power of social relations in the workplace. People are social creatures and so are concerned with their relationships with others and are influenced by what others say and do.
• Rewards that depend on individual, group, and organisational performance. Employees expect to benefit when their efforts improve their employer''s financial performance. On the other hand, dissatisfaction arises when senior managers and shareholders enjoy the benefits of the improvement and not staff. This results in a lack of perceived fairness.
• Job security with expectations of a long-term employment relationship also activates employee reciprocity. If the company makes a long term commitment to a person, they will reciprocate.

Why aren''t all organisations then applying these principles and making the associated improvements in their financial performance? Is it the cost? If the improvements are as significant as research suggests, then upfront costs will definitely be worth it. Often the practices can however, appear costly because the cost of employee remuneration, benefits and training are easily and regularly measured, but the gains made from reduced turnover, higher trust and engagement, reduced absenteeism and more discretionary effort typically aren''t measured at all.

Another reason is because companies tend to copy other companies in their industry and do things the ways others do. A third reason is around power. The decline of the union movement has reduced the power and influence of HR departments to bring about change. Finally, managers tend to assume that employees are self interested and effort averse, which definitely isn''t the case, particularly if the 5 key practices are followed.

More information

For more information on how employee engagement can help your bottom line, contact Greg Halse at Crossroads Human Resources on 9862 5900.

More information

For more information from Cleardocs:

• see earlier ClearLaw articles on HR here;
• see an overview of our HR Policies and Procedures Manual here &mdash you can order online from that page;

.register with Cleardocs to receive ClearLaw articles like this one by email and to receive an email when Cleardocs launches it Employment Contract and its Consultancy/Independent Contractor Agreement.