IMPACT OF HUMAN RESOURCE MANAGEMENT (HRM) PRACTICES ON ORGANIZATIONAL PERFORMANCE: A MEDIATING ROLE OF EMPLOYEE PERFORMANCE By Tahir Masood A research thesis submitted to the Department of Management Sciences, Mohammad Ali Jinnah University, Islamabad in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY IN MANAGEMENT SCIENCES (HUMAN RESOURCE MANAGEMENT) DEPARTMENT OF MANAGEMENT SCIENCES MOHAMMAD ALI JINNAH UNIVERSITY ISLAMABAD OCTOBER 2010 IMPACT OF HUMAN RESOURCE MANAGEMENT (HRM) PRACTICES ON ORGANIZATIONAL PERFORMANCE: A MEDIATING ROLE OF EMPLOYEE PERFORMANCE By Tahir Masood A research thesis submitted to the Department of Management Sciences, Mohammad Ali Jinnah University, Islamabad in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY IN MANAGEMENT SCIENCES (HUMAN RESOURCE MANAGEMENT) DEPARTMENT OF MANAGEMENT SCIENCES MOHAMMAD ALI JINNAH UNIVERSITY ISLAMABAD OCTOBER 2010 Copyright© 2010 by Tahir Masood All rights are reserved. No part of material protected by this copy right notice may be reproduced or utilized in any other form or any means, electronic or mechanical, including photocopying, recording or by information storage and retrieval system, without the permission from the author. ii TABLE OF CONTENTS CHAPTER 1 -------------------------------------------------------------------------------------1 INTRODUCTION -------------------------------------------------------------------------------1 1.1 HRM MODELS AND FRAMEWORK -----------------------------------------------------4 1.2 SIGNIFICANCE AND PHILOSOPHY OF HRM -------------------------------------------5 1.3 WORKFORCE AND EMPLOYMENT INDEX ----------------------------------------------7 1.4 RESEARCH PURPOSE --------------------------------------------------------------------7 1.5 STATEMENT OF THE PROBLEM ---------------------------------------------------------8 1.6 SIGNIFICANCE OF THE PROBLEM -------------------------------------------------------9 1.7 RESEARCH QUESTIONS -----------------------------------------------------------------9 1.8 ORGANIZATION ------------------------------------------------------------------------ 10 CHAPTER 2 ----------------------------------------------------------------------------------- 11 REVIEW OF LITERATURE ---------------------------------------------------------------- 11 2.1 THEORETICAL BACKGROUND -------------------------------------------------------- 11 2.2 MODE OF THEORIZING ---------------------------------------------------------------- 11 2.3 PRECEDING STUDIES ------------------------------------------------------------------ 11 2.4 PERCEIVED ORGANIZATIONAL PERFORMANCE (POP) ---------------------------- 15 2.5 FINANCIAL ORGANIZATIONAL PERFORMANCE (FOP) ----------------------------- 16 2.5.1 Marris Ratio ---------------------------------------------------------------------- 16 2.5.2 Tobin’s Q -------------------------------------------------------------------------- 17 2.5.3 Return on Equity (ROE) --------------------------------------------------------- 17 2.5.4 Return on Assets (ROA) --------------------------------------------------------- 18 2.6 RECRUITMENT & SELECTION (R&S) ------------------------------------------------ 18 2.7 TRAINING & DEVELOPMENT (T&D) ------------------------------------------------ 20 2.8 PERFORMANCE MANAGEMENT (PM) ----------------------------------------------- 22 2.9 CAREER PLANNING SYSTEM (CPS) ------------------------------------------------- 24 2.10 COMPENSATION SYSTEM (CS) ------------------------------------------------------- 27 2.11 EMPLOYEE PARTICIPATION (EP) ---------------------------------------------------- 32 2.12 EMPLOYEE PERFORMANCE (EP) ----------------------------------------------------- 35 CHAPTER 3 ----------------------------------------------------------------------------------- 38 METHODOLOGY ---------------------------------------------------------------------------- 38 3.1 STUDY DESIGN ------------------------------------------------------------------------ 38 3.2 POPULATION --------------------------------------------------------------------------- 38 3.3 SAMPLING ------------------------------------------------------------------------------ 38 3.4 INSTRUMENTATION ------------------------------------------------------------------- 39 3.5 PILOT STUDY -------------------------------------------------------------------------- 40 3.6 DATA COLLECTION ------------------------------------------------------------------- 45 3.7 PROCEDURES FOR DATA ANALYSIS -------------------------------------------------- 47 3.8 RESPONDENTS CHARACTERISTICS --------------------------------------------------- 48 3.9 FREQUENCIES -------------------------------------------------------------------------- 48 iv 3.9.1 Age --------------------------------------------------------------------------------- 48 3.9.2 Gender ----------------------------------------------------------------------------- 49 3.9.3 Education ------------------------------------------------------------------------- 49 3.9.4 Experience ------------------------------------------------------------------------ 49 3.9.5 Industry Type --------------------------------------------------------------------- 50 3.9.6 Organizational Life -------------------------------------------------------------- 50 3.9.7 Number of Employees in the Organization ----------------------------------- 50 3.10 RELIABILITY --------------------------------------------------------------------------- 51 3.11 RESEARCH MODEL AND VARIABLES ------------------------------------------------- 55 3.12 THEORETICAL FRAMEWORK ---------------------------------------------------------- 55 3.13 HYPOTHESIS --------------------------------------------------------------------------- 57 3.14 DEPENDENT VARIABLE --------------------------------------------------------------- 59 3.14.1 Perceived organizational performance (POP) ------------------------------ 59 3.15 MODERATING VARIABLE ------------------------------------------------------------- 60 3.15.1 Employee performance --------------------------------------------------------- 60 3.16 INDEPENDENT VARIABLES ----------------------------------------------------------- 61 3.16.1 Recruitment & Selection ------------------------------------------------------- 61 3.16.2 Training & Development ------------------------------------------------------ 62 3.16.3 Performance Appraisal -------------------------------------------------------- 62 3.16.4 Career Planning System ------------------------------------------------------- 63 3.16.5 Employee Participation -------------------------------------------------------- 64 3.16.6 Compensation System ---------------------------------------------------------- 65 3.16.7 Control variables --------------------------------------------------------------- 66 CHAPTER 4 ----------------------------------------------------------------------------------- 67 RESULTS AND DISCUSSION ------------------------------------------------------------- 67 4.1 RESULTS -------------------------------------------------------------------------------- 69 4.1.1 Research Question 1: ------------------------------------------------------------ 69 4.1.2 Research Question 2: ------------------------------------------------------------ 72 4.1.3 Research Question 3: ------------------------------------------------------------ 77 4.1.4 Research Question 4: ------------------------------------------------------------ 82 4.1.5 Research Question 5: ------------------------------------------------------------ 88 4.2 SCATTER PLOTS ------------------------------------------------------------------------ 91 CHAPTER5 ------------------------------------------------------------------------------------ 93 SUMMARY, CONCLUSION AND RECOMMENDATIONS ------------------------- 93 5.1 DISCUSSION OF FINDINGS ------------------------------------------------------------ 93 5.2 CONTRIBUTION OF THE CURRENT STUDY ------------------------------------------ 97 5.3 IMPLICATION FOR MANAGEMENT --------------------------------------------------- 98 5.4 LIMITATIONS OF THE STUDY --------------------------------------------------------- 99 5.5 DIRECTIONS FOR FUTURE RESEARCH ---------------------------------------------- 100 5.6 CONCLUSION -------------------------------------------------------------------------- 101 REFERENCES ------------------------------------------------------------------------------- 102 v APPENDICES -------------------------------------------------------------------------------- 117 7.1 ANNEXURE I: QUESTIONNAIRE ----------------------------------------------------- 117 7.2 ANNEXURE II: SCATTER DIAGRAM ------------------------------------------------- 126 7.3 ANNEXURE III: FREQUENCIES ------------------------------------------------------ 130 7.4 ANNEXURE IV: FINANCIAL PERFORMANCE INDICATORS, (2004-2008) -------- 153 INDEX ----------------------------------------------------------------------------------------- 158 vi LIST OF TABLES TABLE 3.1: DESCRIPTIVE STATISTICS ........................................................................ 41 TABLE 3.2: CORRELATION MATRIX OF DEMOGRAPHIC VARIABLES ............................ 42 TABLE 3.3: INDUSTRY RESPONSE RATE ...................................................................... 47 TABLE 3.4: DEMOGRAPHICS ...................................................................................... 48 TABLE 3.5: RESPONDENTS’ AGE ................................................................................ 48 TABLE 3.6: RESPONDENTS’ GENDER .......................................................................... 49 TABLE 3.7: RESPONDENTS’ EDUCATION .................................................................... 49 TABLE 3.8: RESPONDENTS’ EXPERIENCE .................................................................... 49 TABLE 3.9: INDUSTRY TYPE ...................................................................................... 50 TABLE 3.10: ORGANIZATION LIFE IN YEARS ................................................................ 50 TABLE 3.11: NO OF EMPLOYEES .................................................................................. 51 TABLE 3.12: DESCRIPTIVE STATISTICS OF DEMOGRAPHIC VARIABLES ......................... 51 TABLE 3.13: RELIABILITY ANALYSIS .......................................................................... 52 TABLE 4.1: VARIABLES INCLUDED IN ANALYSES ...................................................... 68 TABLE 4.2: CORRELATION OF DEMOGRAPHICS WITH OP, MR, TQ, ,ROE, ROA ....... 70 TABLE 4.3: REGRESSION ANALYSIS DEMOGRAPHICS WITH (POP) ............................ 71 TABLE 4.4: DESCRIPTIVE STATISTICS ........................................................................ 73 TABLE 4.6: REGRESSION ANALYSIS (POP) AND HRM PRACTICES ............................ 78 TABLE 4.7: REGRESSION ANALYSIS (MR) AND HRM PRACTICES ............................ 79 TABLE 4.8: REGRESSION ANALYSIS (TQ) AND HRM PRACTICES .............................. 79 TABLE 4.9: REGRESSION ANALYSIS (ROE) AND HRM PRACTICES ........................... 80 TABLE 4.10: REGRESSION ANALYSIS (ROA) AND HRM PRACTICES ........................... 81 TABLE 4.11: REGRESSION ANALYSIS, (POP) AND HRM PRACTICES ............................ 83 TABLE 4.12: REGRESSION ANALYSIS, (MARRIS RATION) AND HRM PRACTICES ......... 83 TABLE 4.13: REGRESSION ANALYSIS, (TOBIN’S Q) AND HRM PRACTICES ................... 86 TABLE 4.14: REGRESSION ANALYSIS, (RETURN ON EQUITY) AND HRM PRACTICES .... 86 TABLE 4.15: REGRESSION ANALYSIS, (RETURN ON ASSETS) AND HRM PRACTICES ..... 87 TABLE 4.16: MEDIATION REGRESSION ANALYSIS (EP) AS MEDIATOR .......................... 88 vii LIST OF FIGURES FIGURE 3.1: PROCESS FOLLOWED FROM POPULATION TO SAMPLING TO ELEMENTS ..... 44 FIGURE 3.2: SCHEMATIC DIAGRAM OF THEORETICAL MODEL ...................................... 56 FIGURE 4.0: SCATTER DIAGRAM ................................................................................. 92 viii ABBREVIATIONS ANOVA Analysis of Variance CPA Career Planning System CS Compensation System Edu Education EP Employee Performance EPA Employees Participation EXP Experience Gen Gender HCM Human Capital Management HCD Human Capital Development InT Industry Type IVR Interactive Voice Response JRS Joint Reward System NPD New Product Development NEO No of Employees in Org OFP Organizational Financial Performance OPI Organizational Performance Index POP Perceived Organizational Performance OrL Organization Life in Years PA Performance Appraisal PAK Pakistan PCS People Centered Strategies PEM Personnel Management PIM Pakistan Institute of Management PM People Management RA Regression Analysis R&D Research and Development ROA Return on Assets ROCP Return on Career Planning ROC Return on Compensation ROE Return on Equity ROEP Return on Employee Participation ROPA Return on Performance Appraisal RORS Return on Recruitment & Selection ROTD Return on Training & Development RS Recruitment & Selection TD Training & Development TQ Tobin’s Q MR Marris Ratio JRS Joint Reward System NPD New Product Development HCD Human Capital Development ix ACKNOWLEDGEMENTS I am indebted and thankful from the core of heart to Allah Almighty whose countless blessings made me able to give my best in completion of this thesis. A special thanks goes to my parents for giving me life in the first place, for educating me in both arts and sciences, for their unconditional support and encouragement to pursue my interests, even when the interests went beyond the boundaries of language, It gives me immense pleasure and honor to extend my deepest gratitude to my supervisor Dr. Aisha Akbar for her kind and valuable support throughout the completion of this thesis. Dr. Aisha was always there to listen and to give advice. I am truly grateful to all of my teachers for their kind contribution in enhancing my knowledge and capabilities, especially Dr. Safdar Ali Butt, Dr. Zafar Moein Nasir, Dr. Tariq Javaid, Dr. Syed Tahir Hijazi, Dr. Rehana Siddiqui and all others. I must acknowledge the support and help of my friends Mr. Arif Khattak, Dr. M. Aslam Khan, Dr. Zulfiqar Ali Shah, Dr. Amir Shah, Dr. Zaheer Abbas, Dr. Arshad Hasan, Dr. Safiullah Khan, Dr. Attaullah Shah, Mr. Asif Kiani, Mr. Wasim Ahmed, Mr. Hassan Rasool, Mr. Fawad Bashir, Mr. Muhammad Tahir Iqbal, Mr. Muhammad Bilal Khan, Mr. Bilal Aziz and Mr. Abaid Ullah Waqar. I cannot begin to list everyone who helped me, but I extend my sincere thanks to each of them who helped me with my data collection. I am thankful to HRM professionals who took time to complete the questionnaires. Tahir Masood x