ejefas_24_15

European Journal of Economics, Finance and Administrative Sciences

ISSN 1450-2275 Issue 24 (2010)

© EuroJournals, Inc. 2010

http://www.eurojournals.com

Effects of Human Resource Management Practices on

Organizational Performance – An Empirical Study

of Oil and Gas Industry in Pakistan

Muhammad Asif Khan

Assistant Professor, Shaheed Zulfikar Ali Bhutto Institute of Science and Technology

(SZABIST) Islamabad, Pakistan

E-mail: [email protected]

Tel: 92-51-4863363 / 209

Abstract

The study evaluates the effects of human resource management practices on organizational

performance in Oil and Gas Industry in Pakistan. A total of 150 managers of 20 randomly

selected firms from Oil and Gas Industry responded to self-reported questionnaire that

measured five HRM practices and subjective measures of organizational performance.

Factor analysis was performed to identify human resource management practices.

Regression analysis indicated a positive and statistically significant association of these

practices with organizational performance. The study provides insight to management to

use these practices as strategic tool for superior performance, and add to the limited

empirical knowledge that exists in Pakistani context.

Keywords: Human resource management, organizational performance, Oil and gas

industry, Pakistan.

1. Introduction Changing business environment in knowledge economy has made adoption of human resource

management (HRM) imperative for competitive advantage. The impact of HRM practices on business

performance has been extensively studied in the recent past. These studies have found a positive

association between HRM practices and firms’ performance (Becker & Huselid, 1998; Chang & Kuo,

2004; Jarventaus, 2007; Rizov & Croucher, 2008; Sang, 2005). Most of these studies have been

undertaken in the United States, and Europe (Boseli et al., 2001; Hoque, 1999) and Asia (Bjo¨rkman, I.

and Xiucheng, 2002; Kundu & Malhan, 2007; Ngo et al., 1998). Within Pakistan, limited research has

been done to examine the relationship of HRM practices and organizational performance.

The strategic role of HRM has been well established. In Pakistan, there has been immense

realization of the impact of strategic use of HRM practices and visionary companies are setting the

pace to leverage this aspect for competitive advantage. HRM practitioners are striving to meet the

emerging challenges of new values of knowledge workers who have necessitated a new paradigm of

peoples’ management characterized by heavy investment in human capital and innovative use of HRM

practices for attraction and retention of talents for organizational sustainability.

The Oil and Gas Industry in Pakistan is vital for the economy and considered as an issue of

national self reliance, national security, and a major source of government’s revenues. With limited

proven reserve of oil and gas in the country, Pakistan meets only 18% of the total domestic demands.

The government incurs a colossal amount of scare foreign exchange on the import of oil bill. The

158 European Journal of Economics, Finance and Administrative Sciences - Issue 24 (2010)

economic environment in the country and dependence on imported oil has accentuated the problems

for the government, people, and organizations. To meet the challenges of shortage of oil and gas, the

government of Pakistan announced new Policy in 2009 for this Industry. The policy envisions self

sufficiency in oil and gas production and a proactive approach on development of human resource to

the international standards, and creating conducive environment for their retention in the country.

Organizations operating in Oil and Gas Industry in Pakistan are aligning their strategy to meet the laid

down objectives. Doek-Seob (2001) noted that HRM practices become a strategic instrument during

economic downturn.

No empirical research has so far been undertaken to investigate the effects of HRM practices on

firms’ performance in this industry. Thus a gap exists in the research in this area of strategic

importance. The present study is an attempt to address this gap. The present study will offer valuable

insight to the management of these organizations about the strategic importance of HRM practices for

superior and sustainable organizational performance. In addition, it will add information to the limited

empirical knowledge about link of HRM practices and business performance in a developing economy,

where the strategic role of HRM is gaining popularity as a vital tool for business performance.

The aim of this study is to examine the effects of HRM practices on organizational performance

in Oil and Gas Industry in Pakistan.

2. Literature Review Lately, human resource management has emerged as an essential factor for sustained competitive

advantage. Research highlights that organizations develop sustained competitive advantage through

management of scare and valuable resources (Barney, 1991). The human resource enables

organizations to achieve optimization of resource, effectiveness, and continuous improvement

consistently (Wernerfelt, 1984). An organization take time to nurture and develop human capital in the

form of knowledge, skills, abilities, motivation, attitude, and interpersonal relationship, and makes it

difficult for competitors to imitate (Becker & Gerhart, 1996). Pfeffer (1994) stressed that human

resource has been vital for firm sustained performance. In knowledge economy, the human resource

has been recognized as a strategic tool, essential to organizational profitability and sustainability. This

realization has led to the new role of human resource managers as strategic partners in formulation and

implementing organizational strategy (Myloni et al., 2004). Organizations are pursing proactively

human resource management (HRM) practices and systems to capitalize on strength of this vital asset

for sustained competitive advantage in knowledge economy (Jackson & Schuler, 2000; Mac Duffie,

1995)

Review of literature indicated essential HRM practices as workforce planning (Matthis &

Jackson, 2004); job analysis (Cascio, 2006; Dessler, 2003); training and development (Kundo, 2003);

recruitment and selection (Kulik, 2004); compensation and reward (Milkovich & Newmen, 1999);

performance appraisal (Bernardin & Russel, 1993); career management (Schein, 1996); human

resource information system (Wolfe, 1998); quality of work life, personnel diversity, employees

attitude surveys (Armstrong, 2005; Bracken, 2000; Hayes, 1999).

In meta-analysis of 104 articles, Boselie et al., (2005) concluded that the top four HRM

practices are efficient recruitment and selection, training and development, contingency and reward

system, and performance management that have been extensively used by different researchers.

In recent years, the focus of research on HRM has shifted from study and relationship of

individual HRM practices on business performance to entire HRM system and its influence on

organizational performance. The researchers have different views about this new paradigm. Some

researchers claim that the system view of HRM is appropriate, but others contend “that to arbitrarily

combine multiple [HRM sub-] dimensions into one measure creates unnecessary reliability problems’

(Becker & Huselid, 1988, p.63). In addition, comprehensive examination of individual HRM practices

highlights the significant predictor of business performance (Bjo¨rkman & Budhwar, 2007).


Researchers have used financial and non financial metrics to measure organizational

performance. The financial measures include profit, sales, and market share. Non-financial measures

include productivity, quality, efficiency, and the attitudinal and behavioural measures such as

commitment, intention to quit, and satisfaction. (Dyer & Reeves, 1995).

Divergent views exist to measure the organizational performance based on financial as well as

non-financial measures. Hoskisson et al., (2000) identified the problems related to measurement of

financial dimensions in emerging economies. It has been argued that lack of market based financial

reporting, inadequate regulatory mechanism and enforcement about financial reporting, lack of

transparency in financial reporting, and provision of fictitious financial information are important

issues facing emerging economies (Bae & Lawer, 2000; Hoskisson et al., 2000).

A subjective measure facilitates managers to take into account organizational goals when

evaluating its performance. Researchers argue that though perceptual measure may introduce

limitations, the benefits are far greater than the risks. Several researchers have “raised persuasive

doubts about the causal distance between an HR input and such output based on financial performance.

Put simply, so many other variables and events, both internal and external, affect organizations that this

direct relationship rather strains credibility (cited in Boselie et al., 2005, p.75).” The researchers argued

that more proximal measures over which employees exert influence are theoretically more plausible

and methodically easier to link. These include productivity (Chang & Chen, 2002; Huselid, 1995; Kato

& Morishima, 2002; quality of product and service (MacDuffie, 1995; Jayaram et al., 1999), job

satisfaction (Guest, 1999; Hoque, 1999), employees turnover intentions (Batt, 2002; Shaw et al., 1998),

absenteeism (Lowe et al., 1997), trust in management (Whitener, 2001), and commitment (Tsui et al.,

1997). Researchers also examined the negative impact of HRM practices on firm performance that

include employees’ stress level (Ramsay et al., 2000); job-home spill over (White et al., 2003). In

literature, primacy exists with regard to the use of subjective measures in earlier studies (Delaney &

Huselid, 1996; Youndt et al., 1996). Strong evidence exist in prior studies that subjective measurement

associate well with objective measures of organization’s performance (Geringer & Hebert, 1991;

Powell, 1992). Wall et al. (2004) found that self-reported data is related to limited biases.

The researchers have investigated empirically the effects of HRM practices on organizational

performance (Becker & Huselid, 1998; Boselie, 2002; Guest, 1997). Recent studies reflect an

impressive influence of HRM practices on organizational performance. Researchers have divergent

views about impact of HRM practices and firms’ performance. They argue that HRM practices and

performance research have common attributes as well as contradictions (Boselie et al., 2005; Katou &

Budhwar, 2006; Wall & Wood, 2005, Wright & Boswell, 2002).

In a study in Greece, Katou and Bedhwar (2006) found that HRM practices of staffing, training

and promotion, involvement of employees, incentives, and safety and health have positive relationship

with firms’ performance.

In a study of managers from Taiwan and Cambodia, Sang (2005) concluded that workforce

planning; staffing; compensation, and incentives; teamwork; training, and employee security had a

positive and significant influence on non-financial and financial dimensions of organizational

performance. The study validated the positive effects on operational dimensions of performance,

namely, production flexibility, product cost, product quality, and product delivery.

In a comparative study of United States and Japan, Ichniowski and Shaw (1999) found that

Japanese firms were more productive than United States’ firms on account of implementing HRM

practices.

In a study in Taiwanese high technology firms, Chang and Chen (2002) established that HRM

practices of workforce planning, training and development, benefits, teamwork, and performance

appraisal significantly affected productivity. The study also found the negative relationship between

human resource planning and employees’ turnover.

Ngo et al., (1998), in a study in Hong Kong companies, found that HRM practices of training

and compensation increased firms’ performance. Tessema and Soeters (2006) investigated influence of


HR practices in Eritrea. The study found that efficient implementation of these practices enhanced the

performance at individual and organization level.

In a study in India, Paul and Anantharaman (2003) found indirect effects of HRM related

activities on operational and financial performance of firms. The study did not find the causal

association of single HRM practice with business performance. In another study Sing (2003) found that

strategic use of HRM practices positively affect performance of organizations in India.

BjorkmanIn and Xiucheng (2002) investigated the outcome of HRM practices on Western

firms’ performance in China, and found a positive association between HRM practices and

performance. Bartel (2000) evaluated the impact of HRM practices on performance in Canada and

found significantly positive relationship between two constructs.

In Israel, Harel and Tzafrir (1999) found that HR practices had positive relationship with firms’

performance in public and private sectors. In Korea, Bae and Lawler (2000) concluded that HRM

practices significantly affect organizational performance. Lee and Chee (1996) in their study did not

find as association between HRM practices and business performance.

Bae et al., (2003) concluded that high-performance work practices produced excellent results in

Pacific Rim countries. Morishima (1998) concluded that organizations with integrated HR practices

performed well in Japan than organizations with poorly integrated personnel practice

In a study in New Zeeland, Guthrie (2003) validated the impact of HRM practices on employee

turnover and profitability. Lee and Lee (2007) established that workforce planning, teamwork, training

and development, compensation and incentives, performance appraisal, and employees’ security are

important HRM dimensions that affect productivity, product quality, and business performance. In a

study in Taiwan, Chang and Chen (2002) determined significantly positive relationship of HRM

practices with organizational performance. The study also found a negative relationship of workforce

planning with employees’ turnover. It is argued that HRM practices enhance employees’ competency

and motivation that affect organizational performance (Harel & Tzafrir, 1996) contended that HRM

practices based on quality hiring, development, and retention boosts firms’ capability.

Tsai (2006), in a study in Taiwan, found a positive relationship of employees’ empowerment

and firms’ performance. In a study of HRM practices in Chinese small and medium enterprises,

participatory decision-making, performance-based pay, free market selection and performance

appraisal, employees’ commitment emerged as the most essential outcome for improving performance

(Zheng et al., 2006).

Rizov and Croucher (2008) empirically examined the relationship of HRM practices and

organizational performance in European firms. They found that collaborative form of HRM practices

(characterized by valuing employees as assets and core partners, creating and communicating a culture

of partnership between employer and employees as well as among employees, communicating

organization’s mission, values, goals and strategy statement through explicit open communication

policy and strong support for employees consultative bodies like unions and committees) reflected

positive and statistically significant association with firms’ performance.

Ahmed and Schroeder (2003) investigated effects of selective hiring, employment security,

decentralization and use of teams, incentive and compensation, extensive training, status differences,

and information sharing on organizational performance (quality, cost, flexibility, delivery and

commitment). The study confirmed the positive and significant relationship of HRM practices with

firms’ operational performance

Researchers (Chiu et al., 2002; Tepstra & Rozell, 1993) have established that HRM practices of

extensive recruitment and selection, training and development, and compensation systems have

positive association with firms’ performance.

Lam and White (1998) established that effective recruitment, competitive compensation, and

efficient training and development have relationship with financial dimensions of performance (growth

in sales, return on assets, and growth in stock values. Green et al., (2006) concluded that integrated


approach to HR practices exhibited satisfied and committed employees who demonstrated remarkable

individual and team performance.

Harel and Tzafrir(1996) argued that HRM practices improve employees knowledge, skills and

abilities (selection and training), through enhanced motivation (compensation and reward). Studies

established that HRM practices aimed at acquisition and development of employees is an essential

investment that develop valuable and rare human assets (Becker & Huselid, 1998)

Huselid(1995) established that high involvement HRM practices have positive relationship with

corporate performance, productivity, work attachment, and financial performance. Delaney and

Huselid (1996) confirmed that selective staffing; compensation and incentive, and training had positive

influence on performance of organization.

A significant number of empirical studies have explored the relationship between HRM

practices and firms’ performance in American organizations (Arthur, 1994; Huselid et al., 1997;

Youndt et al., 1996). Wright et al. (2005) explored the effect of HRM practices on firms’ performance

in 45 business units in America and Canada and established a causal association between HRM

practices and business performance. In Western countries, several studies have examined this

relationship. In a study of 428 firms in Finland, HRM practices had positive influence on firms’

performance Lahteenmaki et al. (1998). Guthrie (2001) studied 128 companies in New Zeeland and

found positive relationship between high-involvement work practices and firms’ performance. In

Taiwan, Chang and Chen (2002) studied 62 firms to determine the effects of HRM practices on

business performance and found a positive association. Stavrou and Brewster (2005), in a study of

3702 firms from European Members countries discovered a positive association between strategic

HRM practices and business performance.

The initial studies focused on establishing a link of single HRM practices to firm’s performance

(Cutcher-Gershenfeld, 1991). Subsequently group of HRM practices were identified as High

Performance Work Systems (HPWS), and researchers established link of HPWP with excellent

performance of organizations (Appelbaum, 2000; Huselid, 1995). Cappelli and Neumark (2001) found

negative outcome of these practices with regard to firm’s performance. Godard (2004) argued that poor

employee relationship limits the effectiveness of these HPWP.

Strong evidence exists in literature about different HRM practices and their effects on superior

firms’ performance. Researchers found a positive relationship between effective recruitment and

selection practices and top-class performance (Harel & Tzafrir, 1996; Delany & Huselid, 1996);

training and development (Bartel, 1994; Fey et al., 2000); compensation and reward (Chie et al., 2002;

Batt, 2002); performance appraisal (Boselie et al., 2001, Bjorkmand & Xiucheng, 2002); employee

relations (Kuo, 2004).

Prior studies have validated the link between HRM practices and superior business performance

in United States and Europe (Boselie et al., 2001; Hoque, 1999); Asia (Bjorkmand & Xiucheng, 2002;

Ngo et al., 1998) and Africa (Chebregiorgis & Karsten, 2007). Empirical studies indicate a strong and

positive association between HRM practices and performance of organizations. (Cappeli, 1998; Katou

& Budhwar, 2007; Kuo, 2004; Huselid et al., 1997; Youndt et al., 1996).

The present study investigated five HRM practices namely; training and development,

recruitment and selection, compensation and reward, performance appraisal, and employee relation and

examined the effects of these practices on subjective measures of performance (product quality,

productivity efficiency and overall perceived performance compared to industry average).

3. Research Hypotheses and Theoretical Framework Based on the comprehensive study of literature, following hypotheses emerge:

H 1: Recruitment and selection has significant relationship with organizational performance.

H 2: Training and development has significant relationship with organizational performance.

H 3: Performance appraisal has significant relationship with organizational performance


H 4: Compensation and rewards has significant relationship with organizational performance.

H 5: Employee relations has significant relationship with organizational performance.

4. Research Method 4.1. Sample and Data Collection

Questionnaire survey was carried out between June-December 2009. Presently twenty eight companies

(Public and Private Sectors) are operating in Pakistan. Primary data was collected from a sample of 20

randomly selected companies operating in public and private sectors in Oil and Gas Industry in

Pakistan. The companies were chosen from the directory of Ministry of Petroleum and Natural

Resource, Government of Pakistan. Two hundred questionnaires were despatched to these companies.

A total of 150 filled questionnaires were received with a response rate of 75%. The respondents were

managers in these companies at various tiers of management.

4.2. Measurement Development

Most of the statements used in the survey were drawn from an in-depth study of literature on HRM

practices and its impact on organizational performance. The items used in the study were adapted from

different studies (Ghebregiorgis & Karsten, 2007; Kundu & Malhan, 2007; Lee & Lee, 2007; Tzafir,

2005).

The instrument measured five HRM practices and its effect on organizational performance. The

recruitment and selection practices contained (5 items); training and development (8 items);

performance appraisal (6 items); compensation and rewards (6 items); employee participation (4

items); and organizational performance (5 items) respectively. The organizational performance

measure included (5 items) related to perceived quality of products and services, production cost,

market share, performance relative to competitors, and organization’s performance relative to industry

average. Five points rating scale was used to measure the response. The scale ranged from five

(strongly agree) to one (strongly disagree).

4.3. Pilot Testing of Instrument

The instrument was pilot tested using a sample of 40 managers from the population. The results of pilot

study reflected appropriate adequacy (Nunnally, 1978).The Cronbach’s alpha of variables ranged from

0.782 to 0.856 respectively.

4.4. Results and Analysis

4.4.1. Descriptive Statistics

The results of descriptive statistics indicated general agreement of the respondents to the different

HRM practices. The mean values ranged from highest 4.876 to lowest 4. 123). The results for training

and development indicated highest concurrence (Mean = 4. 876, Standard Deviation = 0.715);

recruitment and selection (Mean = 4.431, Standard Deviation = 0.829); performance appraisal (Mean =

4.217, Standard Deviation = 0.737); compensation and reward (Mean = 4.129, Standard Deviation =

0.924); employee participation (Mean = 4.123, Standard Deviation = 0.847); and organizational

performance (Mean = 4.738, Standard Deviation = 0.571) respectively. The mean score and standard

deviation reflected conformity of respondents’ perception about these HRM practices and the

agreement to the model.

4.1.2. Reliability and Validity of Data

The results indicated Cronbach’s alpha for questionnaire (35 items) was 0.931. The Cronbach’s alpha

for individual variable of recruitment and selection (0.785); training and development (0.802);


performance appraisal (0.845); compensation and reward (0.794); and organizational performance

(0.823) were found above acceptable level (Nunnally, 1978). Results are at Table 1.

4.1.3. Test of Normality of Data

Collinearity test was undertaken to determine the normality of data. Results are at Table 3.The results

reflected that Tolerance levels (< or equal to 0.01) and Variation Inflation Factor (VIF) values (below

10) were within acceptable range (Kleinbaum et al., 1988). Durbin Watson values for all factors were

between 1.5 and 2.5). The results did not indicate multicollinearity between variables. Results are at

Table 2.

Table 1: Reliability Analysis

Variables Cronbach’s Alpha

Recruitment and Selection .785 Training and Development .802

Performance Appraisal .845

Compensation and Rewards .794

Employee Relations .826

Organizational Performance .823

Overall Alpha for the instrument .931

Table 2: Test of Collinearity

Variables Tolerance Variance Inflation Factor (VIF)

Recruitment and Selection. 651 1.537

Training and Development .585 1.709

Performance Appraisal .507 1.974

Compensation and Rewards .733 1.364

Employee Relations .704 1.364

4.1.4. Correlation Analysis

The results of correlation analysis are at Table 3. The results indicated that all variables have positive

relationship and statistically significant at (p < 0.001).

Table 3: Correlation Matrix

Variables RS TD PA CR EP OP

RS

TD 0.560**

PA 0.409** 0.511**

CR 0.340** 0.321** 0.485**

EP 0.277** 0.358** 0.527** 0.195*

OP 0.440** 0.450** 0.395** 0.361** 0.342** -

** Significance at p < 0.001 level (2 tailed)

* Significance at p < 0.05 level (2 tailed)

RS - Recruitment and Selection

TD - Training and Development

PA - Performance Appraisal

CR - Compensation and Rewards

ER - Employee Participation

OP - Organizational Performance


4.1.5. Factor Analysis

Exploratory principal component factory analysis with Varimax rotation identified five HRM practices

namely; recruitment and selection; training and development; performance appraisal; compensation

and rewards; and employee participation. Results of factory analysis are at Table 4. The Kaiser-Meyer-

Olkin measure of sampling adequacy exhibited score of (0.865). The Bartlett’s test of sphericity is

significant at (p < 0.001).Factors loading (< 0.50) were not shown whereas factors with Eigen values

(>1.0) were retained. The five HRM practices accounted for 62.5% of total explained variance.

The first factor was categorized as recruitment and selection. This factor had five scale items

and related to formal induction, orientation and socialization process, availability of information about

the job, use of comprehensive tests, merit-based hiring and selection on person-job fit philosophy. This

factor accounted for (65%) of explained variance and considered as most vital.

The second factor ‘training and development’ had nine scale items and comprised of need

based training and development criteria, formal training programmes with focus on development, clear

career path for individuals, acquisition of multi-skills, and formal evaluation of effectiveness of

training. This factor explained (54 %) of variance.

The third factor ‘performance appraisal’ accounted for (52 %) of variance. This factor consisted

of six items pertaining to objective, fair and transparent performance appraisal system with strategic

congruence, quantifiable results, participation of employees in performance goal setting, continuous

formal and informal monitoring, and feedback about performance, and provisions to employees to

challenge the rating by supervisors.

Table 4: Results of Factor Analysis

S.N. Factor and Loading % Variance Explained

1. Recruitment and Selection 65

- RS 1 .849

- RS 2 .785

- RS 3 .806

- RS 4 .798

- RS 5 .787

2. Training and Development 54

- TD 6 .735

- TD 7 .760

- TD 8 .820

- TD 9 .610

- TD 10 .859

- TD 11 .781

- TD 12 .664

- TD 13 .640

3. Performance Appraisal 52

- PA 14 .659

- PA 15 .752

- PA 16 .781

- PA 17 .761

- PA 18 .752

- PA 19 .640

4. Compensation and Rewards 58

- CR 20 .723

- CR 21 .726

- CR 22 .753

- CR 23 .818

- CR 24 .752

- CR 25 .780

5. Employee Relations 53

- ER 26 .802

- ER 27 .755


- ER 28 .733

- ER 29 .610

Notes: Extraction Method: Principal Component Analysis, Rotation Method, Varimax with Kaiser normalization - Factor

loading > 0.50 – Eigen value > 1.

The fourth factor ‘compensation and rewards’ explained (58%) variance. The factor was

defined by six scale items and was primarily related to competitive pay package that is disseminated to

employees, performance-based pay, comprehensive incentive plans based on employees’ contribution

to firm’s objectives, and combination of monetary and non-monetary rewards, and social recognition,

and appreciation.

The fifth factor ‘employee participation accounted for (53 %) of variance and comprised of four

scale items regarding employees participation in decision making, provision of open door

communication, autonomy in their functional areas, and opportunities to suggest improvements in the

way things are performed.

4.1.6. Regression Analysis

The results of regression analysis based on independent variables (recruitment and selection, training

and development, performance appraisal, compensation and rewards, and employee participation are

reflected in Table 5.. The overall model fit for regression equation was determined by F statistics. The

model indicate positive and statistically significant relationship (F = 10.639, p < 0.001). The

independent variables accounted for 42.4% (R2

= 0.424) of variance in dependent variable of

organizational performance. Training and development with highest beta coefficient (0.450) is the most

significant HRM practice followed by recruitment and selection with beta coefficient (0.440),

performance appraisal (Beta = 0.361), compensation and rewards (Beta = 0.361), and employee

participation (Beta = 0.342) respectively.

Table 5: Regression Analysis

Items Proposed Effects Path Coefficient Observed t-value Significance level

Recruitment and Selection + .440 5.362 *000

Training and Development + .450 5.158 *000

Performance Appraisal + .395 4.715 *000

Compensation and Rewards + .361 3.987 *000

Employee Relations + .342 3.987 *000

Significance level: *p < 0.001; N =150

Overall model: F = 10.639; p < 0.001; R2 = 0. 424; Adjusted R

2 = 0.398

5. Discussion The paper contributes to understanding of influence of HRM practices on organizational performance

in Pakistan. The results of the study offered empirical support for the existence of a positive and

statistically significant influence of HRM practices on organizational performance in Pakistan. Our

study of Oil and Gas Sector in Pakistan offered support for the hypothesized positive effects of HRM

practices on organizational performance. The results indicate statistically significant relationship of

recruitment and selection, training and development, performance appraisal, compensation and

rewards, and employee participation with organizational performance. Together with earlier studies on

HRM practices and firms’ performance, the result of present study indicate that extensive use of an

integrated approach to efficient HRM practices yield positive results in term of their effects on

organizational performance. In context of Pakistan, it would be pertinent to substantiate these results

through empirical studies of other industries of the economy.

Review of literature identified five essential HRM practices namely; recruitment and selection,

training and development, performance appraisal, compensation and reward, and employee


participation. These practices have been used in the present study to evaluate the effects of these

practices on organizational performance.

Recruitment and selection primarily aims at attracting maximum number of highly talented

applicants and selecting the best to achieve competitiveness. The process entails concerted efforts by

management to ensure implementation enduring success of organizational strategy. Cisco (2006)

argued that without excellent induction, the execution of organizational strategy may vacillate.

Effective selection system based on modern and need-based tests is essential to affect desirable

selection. Considerable resource are needed to ensure the effectiveness of these selection tests. Pfeffer

(1995) contended that maximum resource should be dedicated to develop top- quality selection system.

Compatible of individual and organizational value is an essential dimension that should receive priority

for sustained retention. Jyothi and Venkatesh (2006) concluded that person-job fit yields sustainable

results. Merit-based and transparent induction system enhances organizational credibility and makes

the workforce loyal to the organization. In addition it communicates prospects of excellent

performance and conveys the employees’ oriented value of the firm. Gomez-Mejia et al. (2003)

strongly favoured an induction system free of discrimination. Effective orientation and socialization

programmes are essential to affect sustained improvement in productivity and reduce intention to quit

(Garvey, 2001)

Delany and Huselid (1996) established that practicing an effective recruitment and selection

process has positive relationship with organizational performance. Researchers have found a positive

and statistically significant association between use of recruitment and selection procedure and profits

(Terpstra & Rozell, 1993), and employee’ productivity (Huselid, 1995; Koch & McGrath, 1996)

In knowledge economy, competencies development forms an essential dimension for firms’

competitiveness. Knowledgeable and highly skilled employees improve productivity, enhance quality

of products and services, affect positive changes in processes and deliver quality service to customers.

Training and development generate tangible outcome (improved productivity, quality of products and

services, and resource optimization), and intangible results in terms of enhanced self esteem, high

morale, and satisfaction of employees due to acquisition of additional knowledge, skills, and abilities.

Kundu (2000) stressed that companies should invest heavily in training the workforce for

implementation of customer focused strategy. Blair and Sisakhti (2007) found that expenditures on

training and development yield enormous benefits. Researchers have concluded that investment in

training yields strategic advantage to the organizations (Bitner & Zeithmal, 2001). Dynamic

environment and changing customers need unique approaches and techniques, and up-to-date skills to

provide differentiated and superior services. Changing business environment necessitates that learning

organizations should spend on training of employees to enhance organizational ability to positively

respond to the dynamic environment (Jarventaus, 2007). Strategic focus on training, acquisition of new

skills based on firms’ future needs, training in hard and soft skills, and evaluating effectiveness of

training are vital to achieve enduring results. Career development has psychological meaning to the

employees. Researchers argue that organizations should pursue participative mechanism to develop

career related objectives of employees, make effective plans, implement and monitor the effectiveness

of these plans to achieve employees’ career objectives (Carnzza, 1982; GreenHaus, 1987; Hall, 1986).

Rigorous research has been done to examine the effects of training and development on

business performance. The researchers found positive and significant link between investment in

training and development activities and firms’ performance (Kallerberg & Moody, 1994; Russel et al.,

1995). Strong evidence exits in literature that organization with effective training pursuits experience

lower employee turnover (Arthur, 1994; Fey et al., 2000). Researchers have also established that

comprehensive training and development activities are positively related to productivity, reduce staff

intention to leave, and organizational effectiveness (Arago’n-Sa’nchez et al., 2003; Lee & Bruvold,

2003. The research concluded that training and development positively affect business performance

(Delaney & Huselid, 1996; Jarventaus, 2007; Kelleberg & Moody, 1994; Koch & McGrath, 1996).


Performance appraisal is based on demonstrated achievement of performance objectives

established pertaining to a specified job within a given time period. This process plays a vital role in

influencing the perception of employees about self and about their contribution toward organizational

goals. Bdernardin and Russel (1993) argued that wider communication of performance appraisal

policies within organizational is essential to make employees clear about their specific role expected as

contribution in organizational performance (Landy & Far, 1980). Haunstein (1998) argued that the

process should be based on objective and quantifiable results. The system should be based on fairness,

objectivity, inclusiveness, ethicality, standardization, and widely communicated (Bernardin et al.,

1998; Landy & Far, 1980; Webb, 2004). Regular monitoring of the performance and constant feedback

about performance is essential to get the desired results. Researchers established that employees’

participation in setting performance goals, clarity about performance standards, flexibility of the

system to respond to the changing needs, and employee right to appeal against performance evaluation

are vital attributes of an effective performance appraisal that contributes toward superior performance

by workforce (Islam & Rasad, 2006; Sidin et al., 2003; Webb, 2004; Wu, 2005).

Strong evidence in literature highlight that performance appraisal has positive link with

business performance. Lee and Lee (2007) found that effective performance appraisal system improves

productivity, and quality. Sang (2005) established that a comprehensive, fair and customers’ focused

performance appraisal system improves business performance. Rahman (2006) found that

comprehensive performance appraisal enhance employees’ commitment. Brown and Hewood (2005)

argued that performance appraisal system has positive link with improved productivity of

organizations. The effective process of monitoring and feedback between employees and supervisors

strengthens the relationships (Cook & Crossman, 2004). Performance appraisal is a vital means to offer

promotion, recognition, and career development (Larsson et al. 2007). Hanley (2005) argued that

developmental purpose of performance appraisal is more productive in influencing organizational

performance. Researchers found positive and significant relationship between performance appraisal

and organizational performance (Ahmed & Schroeders, 2003; Chang & Chen, 2002; Kuo, 2004; Sang,

2005).

Compensation includes all forms of monetary returns and allied services provided to employees

(Milkovich & Newman, 1999). A comprehensive compensation mix augmented by an effective system

of disbursement plays an effective role in attracting the best candidates, shaping employees, behaviour

and performance outcome, and facilitates retention of talents. Application of competencies enhances

performance and improves effectiveness. Berndardin and Russel (1993) concluded that compensation

and reward planning is a vital dimension of effective HRM policies. Mathis and Jackson (2004) argued

that a balanced, fair and competitive compensation and reward system affect the retention of

employees. A valence- based reward philosophy act as the driver or individual and team performance

(Dreher & Dougherty, 2005).

Strong evidence exists in literature about the positive and significant relationship of

compensation and rewards on employees behaviour and organizational performance. Chiu et al., (2002)

stated that compensation and rewards significantly affects organizational outcome. Jyothi and

Venkatesh (2006) found that competency-based pay and rewards improves quality of products and

services, improves employees’ behaviour, and reduces accidents rates in the organization, thereby

making strong contribution toward organizational performance. Researchers have evaluated the

relationship of compensation and reward, and organizational performance. These studies concluded

that an effective compensation and reward system increases sales, reduce staff turnover, and improve

firms’ performance (Chiu et al., 2002; Batt, 2002; Delaney & Huselid, 1996; Dreher & Dougherty,

2005; Gehart & Milkovich, 1992; Gomez-Mejia et al., 1988)

Employee participation is characterized by wide ranging HRM related activities primarily

focused on employee management. These practices include employees sharing schemes, cooperatives,

industrial democracy, unions, employees’ involvement, HRM and high commitment work practices,

team working, collective bargaining, employee empowerment, employee partnership in providing input


in strategic decision making, and employees’ right of information sharing at all levels (Summers &

Hyman, 2005).

The changing business environment and competitive pressures have resulted in flexible

organizational response to employees’ management. The knowledge workers seek elusive goals of

stability, job satisfaction and life-enhancing service and career. The new paradigm of employees’

partnership focuses on new partnership between employers and employees, individualization of

employment relationship, and employee commitment rather than control has become the essential goal

of peoples’ management (Walton, 1985).

Studies provide strong evidence that employee participation positive and significantly affect

business performance. Employee participation fosters commitment and greater quality and output,

productivity, and firms’ performance (Cooke, 1994; Ferney & Metcalf, 1995; Jones, 1987).

Participative approach toward employee increases levels of quality, productivity, and mutual

investment, and efficiency (Whitley, 1999; Hartcourt & Wood, 2007) Wislon and Peel (1990) found a

positive relationship between worker participation and reduced absenteeism and turnover. Reduced

turnover decrease hiring and training cost of firms (Kessler & Purcell, 1992). The results of present

study concur with results of earlier studies that HRM practice of employee participation is positively

and significantly associated with firms’ performance (Amable, 2003; Hall and Soskice, 2001;

Hartcourt & Wood, 2007; Guthrie, 2001; Rizov & Croucher, 2008)

The results of present study are in harmony with the results of prior studies that HRM practices

of recruitment and selection, training and development, performance appraisal, compensation and

reward, and employee participation have positive and significant relationship with organizational

performance (Chen, 2002; Chiu et al.,2002; Chang & Kuo, 2004; Cisco, 2006; Dreher & Dougherty,

2005; Hartcourt & Wood, 2007; Jarventaus, 2007; Jyothi & Venkatesh, 2006 ; Rizov & Croucher,

2008; Sang, 2005).

6. Managerial Implications The study evaluated the association between HRM practices and organizational performance. The

study identified that all HRM practices has positive and significant influence on the firm performance.

The empirical results indicate the Pakistani organizations, both in public and private sectors, are

integrating HRM practices in organizational strategy to improve business performance and remain

competitive. Management should understand the importance of HRM function as a strategic partner

and should incorporate HRM input in strategic decision making. This partnership provides more active

role to HRM experts in the organization to support the change in organizations through partnership of

front-line managers. The management should be aware of the use of these practices in an integrated

manner to realize the organizational objectives. The managers should be well aware that a changed

paradigm of people management is essential in changing business environment. The focus of this new

approach should be to attract and retain the talents and leverage the talent to achieve competitive

advantage through a proactive HRM related activities. It is imperative for managers to fully understand

the strategic pay off of the investment made in training and development. This investment should aim

at constantly improve competencies levels of the workforce. The vital contribution of values and merit-

based recruitment and selection, innovative and need-based training and development, comprehensive,

and fair performance evaluation, competency-based pay and reward, and employee relations to

enhance self esteem, foster satisfaction, and quality of work life are essential dimensions that have

positive effects on superior performance for sustained competitive advantage that need to be

capitalized by management at all level.


6.1. Limitations and Further Study

The study has some limitations. The present study is restricted to a small sample of firms in one

industry and may therefore limit the generalizability of the findings. The respondents’ provided

information on implementation of HRM practices and perceived measure of organizational

performance. The possibility of respondents’ bias in reporting may have happened (Paul &

Annantharaman, 2003).

6.2. Future Research

Despite the above limitations, the study makes significant contribution about understanding and

implementation of HRM practice in one of the most important sector affecting Pakistan’s economy.

Future research may include large scale sample in other industries in Pakistan to statistically validate

the results of present study. It would be valuable to examine the effect of contextual factors of

regulations, labour market environment, organizational climate, and cultural values, and style of

leadership that moderate or mediate the relationship between HRM practices and organizational exist

(Bowen & Ostroff, 2004; Collin & Smith, 2006; Richard & Johnson, 2001). To further explore the

relationship between these two constructs, future research may also focus on longitudinal study

7. Conclusion This study evaluated the effects of HRM practices on organizational performance in Oil and Gas Sector

of a developing economy. Review of literature provides strong evidence of effective HRM practices

and their relationship with firms’ performance in physical and attitudinal dimensions. Our research

empirically substantiated the results of earlier studies with regard to this linkage. The study highlights

the importance of HRM practices to achieve and sustain superior performance in changing business

environment and need for an integrated approach toward formulation and implementation of HRM

practices. The organizations need to proactively pursue a strategic approach to HRM practices and

invest in such practices to achieve sustainable competitive advantage in tangible and intangible

dimensions.

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