CHAPTER 1:

AN INVESTMENT
PERSPECTIVE OF
HUMAN
RESOURCE
MANAGEMENT
Copyright 2005 South-Western. All rights reserved.

The
The Strategic
Strategic View
View of
of Human
Human
Resources
Resources
Employees
Employees are
are human
human assets
assets

Increase
Increaseininvalue
valuetotoorganization
organizationand
andmarketplace
marketplacewhen
when
investments
investmentsofofappropriate
appropriatepolicies
policies&&programs
programsare
areapplied
applied

Effective
Effective organizations
organizations recognize
recognize that
that employees
employees
have
have value
value

Much
Muchas
asorganizations
organizationsphysical
physical&&capital
capitalassets
assetshave
havevalue
value

Employees
Employees are
are valuable
valuable source
source of
of sustainable
sustainable
competitive
competitive advantage
advantage

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Exhibit
Exhibit1-1
1-1

Sources
Sources of
of Employee
Employee Value
Value

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Sources
Sources of
of Employee
Employee Value
Value
Technical
Technical Knowledge
Knowledge

Markets,
Markets,processes,
processes,customers,
customers,environment
environment

Ability
Ability to
to Learn
Learn and
and Grow
Grow

Openness
Opennesstotonew
newideas
ideas
Acquisition
Acquisitionofofknowledge
knowledge&&skills
skills

Decision
Decision Making
Making Capabilities
Capabilities
Motivation
Motivation
Commitment
Commitment
Teamwork
Teamwork

Interpersonal
Interpersonalskills,
skills,leadership
leadershipability
ability

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Adopting
Adopting an
an Investment
Investment Perspective
Perspective
Determines
Determines how
how to
to best
best invest
invest in
in people
people
Costs
Costs
Out-of-pocket
Out-of-pocket
Opportunity
Opportunity

Human
Human assets
assets become
become competitive
competitive advantage
advantage
Required
Required skills
skills become
become less
less manual,
manual, more
more
knowledge-based
knowledge-based
Appropriate,
Appropriate, integrated,
integrated, strategy-consistent
strategy-consistent
approach
approach isis needed
needed
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AA Dilemma
Dilemma

Failure
Failure to
to invest
invest in
in employees
employees causes
causes
Inefficiency
Inefficiency
Weakening
Weakening ofof organizations
organizations competitive
competitive
position
position

Human
Human assets
assets are
are risky
risky investment
investment
Require
Require extra
extra effort
effort to
to ensure
ensure that
that they
they
are
are not
not lost
lost
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Exhibit
Exhibit1-2
1-2

Types
Types of
of Organizational
Organizational
Assets/Capital
Assets/Capital

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Research
Research Findings
Findings
HR
HR practices
practices directly
directly related
related to
to profitability
profitability &
&
market
market value
value
Primary
Primary reason
reason for
for profitability:
profitability:
Effective
Effectivemanagement
managementofofhuman
humancapital
capital

Integrated
Integrated management
management of
of human
human capital
capital can
can
result
result in
in 47%
47% increase
increase in
in market
market value
value
Top
Top 10%
10% of
of organizations
organizations studied
studied experienced
experienced
391%
391% return
return on
on investment
investment in
in management
management of
of
human
human capital
capital
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Exhibit
Exhibit1-3
1-3

HR
HR Value
Value Chain
Chain

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HR
HR Metrics
Metrics Are
Are Complex
Complex
90%
90% of
of Fortune
Fortune 500
500 organizations
organizations evaluate
evaluate
HR
HR operations
operations on
on basis
basis of
of three
three metrics:
metrics:
Employee
Employeeretention
retentionand
andturnover
turnover
Corporate
Corporatemorale
morale
Employee
Employeesatisfaction
satisfaction

These
These metrics
metrics do
do not
not necessarily
necessarily illustrate
illustrate
how
how HR
HR impacts
impacts
Profits
Profits
Shareholder
Shareholdervalue
value
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Mercer
Mercer Model
Model of
of Measuring
Measuring HR
HR
Impact
Impact
Identify
Identify problem
problemHR
HRcan
can impact
impact
Calculate
Calculate actual
actual cost
cost of
of problem
problem
Choose
Choose HR
HR solution
solution that
that addresses
addresses problem
problem
Calculate
Calculate cost
cost of
of solution
solution
Calculate
Calculate value
value of
of improvement
improvement 66 to
to 24
24 months
months
after
after implementation
implementation
Calculate
Calculate specific
specific return
return on
on investment
investment
ROI
ROI in
in human
human assets
assets often
often not
not realized
realized until
until some
some
time
time in
in future
future
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Exhibit
Exhibit1-4
1-4

Factors
Factors Influencing
Influencing Investment
Investment
Orientation
Orientation

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Investment-Oriented
Investment-Oriented Organization
Organization
Sees
Sees people
people as
as central
central to
to mission
mission &
& strategy
strategy
Mission
Mission statement
statement &
& strategic
strategic objectives
objectives
espouse
espouse value
value of
of human
human assets
assets in
in achieving
achieving
goals
goals
Management
Management philosophy
philosophy encouraging
encouraging
development
development &
& retention
retention of
of human
human assets
assets
Does
Does not
not treat
treat human
human assets
assets in
in same
same ways
ways
as
as physical
physical assets
assets
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Investment
Investment Orientation
Orientation Factors
Factors
Senior
Senior Management
Management Values
Values &
& Actions
Actions
Managers
Managersneed
needinvestment
investmentorientation
orientationtoward
toward
people
people

Attitude
Attitude Toward
Toward Risk
Risk
Investment
Investmentininhuman
humanresources
resourcesinherently
inherentlyriskier
riskier
Human
Humanassets
assetsnever
neverabsolutely
absolutelyowned
owned

Nature
Nature of
of Skills
Skills Needed
Needed by
by Employees
Employees
The
Themore
moremarketable
marketableemployee
employeeskills,
skills,the
theriskier
riskierthe
the
firms
firmsinvestment
investmentininskill
skilldevelopment
development
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Investment
Investment Orientation
Orientation Factors
Factors
Utilitarian
Utilitarian (Bottom
(Bottom Line)
Line) Mentality
Mentality
Attempt
Attemptmade
madetotoquantify
quantifyemployee
employeeworth
worththrough
through
cost-benefit
cost-benefitanalysis
analysis
Soft
Softbenefits
benefitsofofHR
HRprograms
programsdifficult
difficulttotoobjectively
objectively
quantify
quantify

Availability
Availability of
of Outsourcing
Outsourcing
Given
Givenavailability
availabilityofofcost-effective
cost-effectiveoutsourcing,
outsourcing,
investments
investmentsininHR
HRshould
shouldproduce
producehighest
highestreturns
returns&&
sustainable
sustainablecompetitive
competitiveadvantages
advantages..
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Reading
Reading1.1:
1.1:The
TheHidden
HiddenLeverage
Leverageof
ofHuman
HumanCapital
Capital

Model
Model for
for Management
Management Success
Success

Strengthen
Strengthen key
key
relationships
relationships
Customers
Customers
Employees
Employees
Shareholders
Shareholders

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Leverage
Leverage
downtime
downtime
Use
Usevariable-pay
variable-pay
Address
Addressneglected
neglected
areas:
areas:
Infrastructure
Infrastructure
Marketing
Marketing
Operations
Operations

116

Reading
Reading1.1
1.1

Model
Model for
for Management
Management Success
Success
Refocusing
Refocusing staff
staff on
on
whats
whats important
important
Performance
Performance
management
managementas
as
disciplined,
disciplined,strategic,
strategic,
value-added
value-addedprocess
process
Clearly
Clearlydefine,
define,
differentiate
differentiate&&balance
balance
between
betweencore
core
competencies
competencies&&results
results

Copyright 2005 South-

Building
Building return
return on
on
compensation
compensation
Link
Linkbase-pay
base-pay
progression
progressiontoto
competency
competency
achievement
achievement
Link
Linkincentive
incentivepay
paytoto
annual,
annual,semiannual,
semiannual,oror
quarterly
quarterlyresults
results

117

Reading
Reading1.2
1.2

Seven
Seven Common
Common Misconceptions
Misconceptions
1.
1. Conscientiousness
Conscientiousness isis aa better
better predictor
predictor of
of
performance
performance than
than intelligence.
intelligence.
2.
2. Companies
Companies that
that screen
screen job
job applicants
applicants for
for values
values
have
have higher
higher performance
performance than
than those
those that
that screen
screen
for
for intelligence.
intelligence.
3.
3. Integrity
Integrity tests
tests dont
dontwork
work well
well in
in practice
practice
because
because so
so many
many people
people lie
lie on
on them.
them.
4.
4. Integrity
Integrity tests
tests have
have adverse
adverse impact
impact on
on racial
racial
minorities.
minorities.
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Reading
Reading1.2
1.2

Seven
Seven Common
Common Misconceptions
Misconceptions
5.
5. Encouraging
Encouraging employee
employee participation
participation isis more
more
effective
effective for
for improving
improving organizational
organizational
performance
performance than
than setting
setting performance
performance goals.
goals.
6.
6. Most
Most errors
errors in
in performance
performance appraisal
appraisal can
can be
be
eliminated
eliminated by
by providing
providing training
training to
to managers
managers on
on
how
how to
to avoid
avoid them.
them.
7.
7. IfIf employees
employees are
are asked
asked how
howimportant
important pay
pay isis to
to
them,
them, they
they are
are likely
likely to
to overestimate
overestimate its
its true
true
importance.
importance.
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Reading
Reading1.2
1.2

1.
1.
2.
2.
3.
3.
4.
4.

Seven
Seven Common
Common Misconceptions:
Misconceptions:
Implications
Implications
Select
Select new
new employees
employees on
on both
both intelligence
intelligence and
and
conscientiousness.
conscientiousness.
Assess
Assess intelligence
intelligenceand
and conscientiousness
conscientiousness before
before
values.
values.
Define
Define the
the values
values that
that are
are important
important and
and assess
assess
them
themthrough
through carefully
carefully developed,
developed, valid
valid
procedures.
procedures.
Use
Use integrity
integrity tests
tests with
with ability
ability tests
tests for
for high
high
predictability.
predictability.

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Reading
Reading1.2
1.2

5.
5.
6.
6.

7.
7.

Seven
Seven Common
Common Misconceptions:
Misconceptions:
Implications
Implications
Develop
Develop compelling
compelling goals;
goals; enlist
enlist participation
participation
and
and support
support itit through
through rewards.
rewards.
Training
Training and
and feedback
feedback are
are important,
important, but
but errors
errors
are
are difficult
difficult to
to eliminate.
eliminate.Top
Top managers
managers should
should
serve
serve as
as role
role models
models in
in quality
quality of
of performance
performance
reviews.
reviews.
Attitude
Attitude surveys
surveys are
are subject
subject to
to biases;
biases; study
study
behaviors
behaviors as
as well
well as
as attitudes.
attitudes.

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Reading
Reading1.3
1.3

Effective
Effective HRM
HRM Practices
Practices

Employment
EmploymentSecurity
Security
Selectivity
Selectivityin
inRecruiting
Recruiting
High
HighWages
Wages
Incentive
Incentivepay
pay
Employee
EmployeeOwnership
Ownership
Information
InformationSharing
Sharing
Participation
Participation&
&
Ownership
Ownership
Self-Managed
Self-ManagedTeams
Teams

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Training
Training&
&Development
Development
Cross-Utilization
Cross-Utilization&
&
Cross-Training
Cross-Training
Symbolic
SymbolicEgalitarianism
Egalitarianism
Wage
WageCompression
Compression
Promotion
PromotionFrom
FromWithin
Within
Taking
Takingthe
theLong
LongView
View
Measurement
Measurementof
ofPractice
Practice
Overall
OverallPhilosophy
Philosophy

122

Reading
Reading1.3
1.3

Effective
Effective HRM
HRM Practices
Practices
Very
Very few
few firms
firms will
will engage
engage in
in all
all practices
practices
While
While these
these practices
practices are
are important
important for
for
success,
success, there
there are
are other
other determinants
determinants as
as
well
well
Downsides
Downsides exist
exist
Requires
Requiresmore
moreinvolvement
involvementand
andresponsibility
responsibilitythan
than
some
someemployees
employeeswant
want
Managers
Managers&&others
othersmay
mayresist
resistthem
themas
aswell
well
Turnover
Turnovermay
mayresult
result
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