HRM Practices in Small Firms

HRM Practices in Small Firms



1.0 Introduction

The global industrialisation in the last few years has been strongly supported by the Small and Medium Enterprises (SMEs). Statistically, the small enterprises in particular have evinced an immense potential as economic expansion stimulators and economic downturn stabilisers (Varum & Rocha, 2013). The small-sized firms worldwide have even outperformed many of the reputed corporate giants in terms of economic growth, employment, social integration and innovation. Extensive research has proved that the informal Human Resource Management (HRM) practices implemented in the small-sized firms are the key to their enviable success. Integration of these HRM policies with some of the core motivational strategies has further accelerated the growth of these firms.

This paper will discuss the different informal HRM practices followed by the small-sized firms and explain the benefits of incorporating these practices within the existing HRM policies of medium-sized firms. The post-integration performance will be discussed with reference to the different theories of management such as Signalling Theory, Hierarchy theory, Social exchange theory, Unified Theory of Brand Equity and P-O Fit theory. The more specified objective of the paper will be to establish how these HRM practices play a key role in employee motivation.

2.0 Elements of informal HRM practices

            The informal structure of HRM policies in the small-sized firms is aimed at strengthening social relations and developing a flexible work environment. The unique feature of these types of HRM policies is the absence of bureaucratic control practiced in bigger companies (Dietz et al., 2006). This helps promote healthy employee relationships through emergent and reactive HRM (Harney & Dundon, 2006). This concept is derived from the “bleak house” perspective (Wilkinson, 1999) and proves to be more effective than the holistic and bureaucratic approach adopted in bigger companies. The relatively informal employee relation helps build employee satisfaction and catalyzes the growth of these small firms.

There are a few key elements of informal HRM practices. The owner himself handles the HRM policies instead of appointing a separate HR specialist. He has the authority to dismiss or hire on his own accord (case-by-case basis) instead of depending on a set of written rules and recruitment policies (Werner & Herman, 2012). The small firms rely more on personal networks and newspaper advertisements rather than on the conventional recruitment policies adopted by the bigger firms. No written HR plan or budget for initial employee training exists in the smaller companies. The most unique feature of these firms is the informal and flexible compensation and benefits structure (determined by the owner on a case-by-case basis) that conforms to the labour laws of the respective country (Werner & Herman, 2012). The job descriptions for any position are not stereotyped and are usually determined by the owner according to the requirements at any point of time. The company has no fixed policies for performance appraisals and goal-setting. The owner usually prefers crude service excellence appraisal method, based on individual performance (Werner & Herman, 2012).

            The owners of these small business enterprises focus more on how the HRM policies are implemented than the formalization of those policies (Psychogios et al., 2016). This is a major contributor of the success of these companies.

3.0 Theoretical perspective of informal HRM practices

            This section will discuss the informal HRM practices in the context of different organizational and motivation theories. The motivational strategies in the small-sized firms discard the concept of stimulating an employee by providing more material rewards (extrinsic rewards) than non-material rewards (intrinsic rewards). The managers of these companies understand the importance of Atchison’s (2003) statement that in certain cases, an incredibly high compensation may act as a “golden handcuff”, overburdening the employee due to a constant high-performance expectation. Two major motivational theories are considered by these managers namely the “Motivation Hygiene Theory” (Herzberg, 1959) and Vroom’s Expectancy theory.

            Herzberg’s theory establishes the fact that money as a “hygiene” factor cannot motivate employees effectively once their lower-level needs (basic needs) are fulfilled (Maslow, 1954). This theory has derived some of the postulates from the Hierarchy Theory (Maslow, 1954), which clearly indicates that the employees focus more on higher order needs such as self-esteem and self-actualisation once their lower order needs (physiological, safety) are satisfied (Maslow, 1954). Taking this into account, the small companies reward the employees with some merit bonus or promotion based on his performance. This helps revive the importance of remuneration as a motivating factor. Through these flexible and unwritten compensation and benefits policy, the small-firm owners help the employees attain transcendence and self-actualisation. This marks the fulfilment of Maslow’s higher order needs (Maslow, 1954).

            The managers of the small firms consider the three key postulates of Vroom’s theory in determining employee motivation namely- Expectancy (E), Instrumentality (I) and Valence (V) (Venugopalan, 2014). Due to the presence of an informal work environment in the small enterprises, the new employees can avail assistance and support from their co-workers and supervisors. They also have easy access to all the resources necessary for the completion of a task (Venugopalan, 2014). This way the company managers succeed in meeting the expectations of the new employees. In the next step, these managers incorporate instrumentality by promising an employee some benefits and rewards if his/her performance is “excellent” (Venugopalan, 2014). Unlike the bigger companies, these compensations are not limited by some rigid policies and norms. This triggers the employee to work towards “overachieving” the target. “Valence” stands for the emotional connection between the employee and his targets. Understanding this connection from a managerial point of view is critical for the synergistic growth of the small companies. The mangers effectively implement all the motivational aspects discussed above by attaching every task to a reward on successful completion (Woldie et al., 2008 ).

             Most of the large companies rely on the P-O (Person-Organisation) Fit theory to evaluate the congruence between the set of values of the applicant and the organisation (Ferris & Judge, 1991). During the time of recruitment, the interviewer seeks this congruence in order to eliminate the possibilities of dissonance in future. But Cable & Judge (2005) have identified that the measurement of these congruence parallels is done idiographically. This method is not so effective when the values exhibited by the interviewees are the products of their perceptions rather than some “objective” reality (Cable & Judge, 2005). This has led to numerous cases of divergence of congruence values in the past. This limitation has been eliminated by some of the successful small firms. They conduct both “P-O Fit evaluation” and Self-Assessment tests in order to understand the actual compatibility of the applicant and the organisation (Cable & Judge, 2005). Hashim & Ismail (2011) have rightly pointed that to achieve this goal, the small companies often resort to the informal “word-of-mouth” advertising technique. This helps the applicants understand the requirements of the company better and make an “informed choice”. Hashim & Ismail (2011) based their arguments on the Social Exchange Theory (Blau, 1964) which emphasizes on the norm of reciprocity. Through the informal HRM policies, the managers of the small firms ensure the reciprocation of the investment, recognition and empowerment in human assets (Blau, 1964).

             A primary concern in large and medium organisations is the access to essential information. To overcome the constraints of information asymmetry, the small-sized enterprises incorporate the principles of Signalling theory (Spence, 2002). These principles facilitate the bidirectional flow of a signal between the sender and the receiver, in this case, the management and the employees. Previous research work by Zhang & Wiersema (2009) identified certain correlation problems between the “sent” and “received” signals. Connelly et al. (2011) have proposed the enhancement of signalling efficiency by increasing the signal frequency. But this technique is not valid for dynamic organisational environments where the signal (information) available to both the sender and the receiver are constantly changing. Effective information sharing in such cases can be enabled by repetitive signalling.

            The small sized firms have discarded the holistic approach of building a unified brand image. They rely more on the “product plus” approach wherein a brand acts as an identifier of a particular product (Ambler & Styles, 1997). Keller & Lehmann (2006) have supported this approach and have suggested that this will help the small firms progress towards a Unified Theory of Brand Equity. This theory conforms to the Signalling Theory in that, this “brand” signals the consumers to the source of products. In the long run, this combined theory will protect the consumers and the producers from competitors who are providing similar products (Keller & Lehmann, 2006). This strategy is helping the small firms sustain themselves in the highly competitive global market.

4.0 Recommendations for medium-sized firms

            Armstrong (2008) has discovered a positive correlation between the HRM practices in an organisation and the overall performance of the firm. Taking this observation into consideration, a few recommendations for the medium sized firms may be proposed. The medium sized firms should incorporate a mixture of non-structured organisational procedures that offer the amount of flexibility required for the growth of the firm. Firstly, they should stop using the conventional techniques of attracting prospective applicants through advertisements and commercials (Mulolli et al., 2015). The “word-of-mouth” advertising technique will give them the privilege of low cost of withdrawal of the applicants. As indicated by Mulolli et al. (2015), the trainings in these firms should be short-termed, informal and reactive, with a greater focus on “problem-solution” approach on a case-by-case basis. An informal routine of financial and non-financial compensation purely based on individual performance can help motivate the employees more.

5.0 Conclusion

            The paper has spoken highly of the HRM practices in small firms. But some major limitations can be pointed out from the above discussions. The informal HRM practices are effective as long as the company size, in terms of the number of employees is constant. But as the company grows, the same HRM policies will cease to be as effective. It would be impossible for a single person (the firm owner) to handle all the organisational procedures. A well equipped HR body or at least a middle management would be necessary for effective employee co-ordination. The best approach for a small firm, gradually transforming into a bigger enterprise would be the incorporation of a mixture of formal and informal HRM practices.



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