Human Capital Orientation and Financial Performance. A Comparative Analysis of US Corporations.

• Author: Bryl, Lukasz
• Position: Report - Abstract

INTRODUCTION

Traditional human relations theories (e.g., Maslow, 1943; Hertzberg, 1959; McGregor, 1960) do not perceive employees as a cost or commodity required in the production process, but rather as a key organizational asset, who are able to create substantial value by launching new products or building sustainable relationships within and outside the entity. In this sense, employees' knowledge and skills should be described as a "form of capital" (human capital). The notion of human capital was first introduced by Schultz (1961). He described human capital as a set of knowledge, skills and abilities that exist in the individual and that are used by him/her. As many authors (Guenther, Beyer, & Menninger, 2003; Huselid, 1995; Pfeffer, 1994; Prahalad & Hamel, 1990) state, an organization's human capital should be perceived as a valuable resource and as a key factor for corporate competitive advantage. Apart from knowledge, company individuals' competence, skills, experience, expertise and capabilities form human capital (Mention & Bontis, 2013). When the people in an organization acquire new knowledge, the value of the company and its intellectual capital (including human capital) are enriched (Vidotto, Ferenhof, Selig, & Bastos, 2017). As argued by Ndinguri, Prieto, and Machtmes (2012) from the perspective of knowledge, human capital has become a key resource for the organization to achieve strategic competitive advantage and thus better performance because it is difficult to be imitated. On the other hand, human capital orientation may result in increased costs in the form of higher salaries and additional benefits, as employees perceive themselves as specialists with unique expert knowledge and thus have greater earnings' expectations and employment conditions. As a result, this may lead to lower cash liquidity and a potential loss of competitive advantage.

The aim of the paper is twofold. First, to state if, and to what extent, human capital orientated firms (employee friendly) are profitable in the long term. Second, an attempt was made to compare the performance of human capital oriented entities with the results of a broad sample of companies from different industries. The research methods adopted for this study are comparative analysis and tools of descriptive statistics.

The structure of this paper is as follows: Section 1 is an introduction which leads into the literature review on human capital and prior research in Section 2. The methodology used in the study is set out in Section 3 while Section 4 outlines the results. Section 5 is the discussion which is followed by Section 6 pointing to conclusions and limitations of the study, along with the future lines of research.

LITERATURE REVIEW

Human capital orientation - characteristics

As in the contemporary business environment, high-skilled labor is aware and capable of the need for ongoing learning, and employees strive for developing greater knowledge to respond to market competition, product innovations and more complex technologies (Appelbaum, Bailey, Berg, & Kalleberg, 2000; Batt, 2002; Snell & Dean, 1992). However, according to Stewart (1999), some employees, by no doubts, should be perceived as valuable assets, but others are only costs (often significantly high). This situation may refer not only to the entire firm but also to selected departments. As a result, Sveiby (1998), when analyzing professional and organizational skills, provides a classification of four types of employees: professional, manager, leader and support personnel. Nevertheless, two types of firms can be still distinguished based on their approach towards employees. According to Kochan and Dyer (2017), one of them can be defined as a low-road strategy firm, with the second as a high-road strategy enterprise. The features of these definitions are shown in Table 1.

Table 1 provides a clear distinction between the two types of firms. Although the first type (described as a low-road strategy) seems to be associated with industrial economy, while the second one (high-road strategy) with knowledge-based economy, in fact, both of them can achieve and preserve sustainable comparative advantage in the contemporary economy. In the case of the low-road strategy, competitive advantage derives from the fact that entities tend to minimalize the costs (mostly those related to employees) which results in relatively lower prices of products and services than the competition. In turn, in the second approach (high-road strategy), firms strive to invest in their employees to increase their satisfaction, commitment and skills, which hopefully will lead to higher efficiency, lower rates of employee turnover, and/or better quality products and services, and thus a competitive advantage based on quality.

In high-road companies, the application of work teams is expected to result in greater adaptability, productivity and creativity, and to provide more innovative and comprehensive solutions to companies' problems (Beers, 2005).

Moreover, the promotion scheme is more fair and transparent, as the employees are encouraged to take part in the decision-making process within the organization, either individually or collectively. As a result, their personal attachment to the firm is greater, which is strengthened by attractive remuneration, additional benefits related to their performance, and more general and specialized training directed at personal development. Consequently, employee job satisfaction and involvement increases which may positively influence general corporate performance. The low-road strategy is the opposite of high-road strategy.

Other terms used to distinguish between two opposite strategies is the approach of Roos, Bainbridge, and Jacobsen (2001) who distinguished the following two types of enterprises: process-oriented and people-centered companies. Such division redefines the approach towards employees and their retention rates. In the process-oriented firms, high labor turnover was unimportant as employees performed unskilled tasks. By contrast, in the people-centered entities employees are the key sources of value creation, especially in modern knowledge-based industries, so keeping them in the firm is of crucial importance. In the people-centered companies retention rate should be minimalized (as talents are scarce and recruitment costs are high), whereas in the process-oriented firms retention rate may be relatively high, as employees perform simple and easy to duplicate tasks (so finding new ones should not be an obstacle) and personnel salary expectations rise slower.

Theoretical deliberations on human capital and its importance lead to the conclusion that conducting human capital orientated strategy is one of the possible ways of achieving sustainable competitive advantage. Moreover, although entities with the greatest levels of human capital awareness may be described differently, the literature provides a common general framework of companies being human capital oriented.

Human capital orientation and firm performance - theoretical deliberations

As human capital orientation is a complex phenomenon and can be analyzed with the help of numerous factors, this article concentrates on the following dimensions: investment in human capital, high skills, team performance, job satisfaction, organization commitment, citizenship behavior, and employee involvement.

Theoretical considerations on the relation between human capital investments and corporate performance lead to several crucial implications. According to, e.g., Oviedo-Garcia, Castellanos-Verdugo, and Sancho-Mejias (2014), knowledge is the most important resource, and its management plays a key role in a firm's performance. Consequently, investments in human capital may increase employee productivity and financial results (Black & Lynch, 1996; Pfeffer, 1998; Snell & Dean, 1992). Similarly, Durrani and Forbes (2003) reinforce these arguments by suggesting that company success is strongly related to the investment flow in human capital and information technology. Moreover, investment in people results in improved individual performance; increased organizational productivity; and economic development; as well as other societal benefits (Lynham & Cunningham, 2006; Nafukho, Hairston, & Brooks, 2004). As the level of human capital is increased, people develop more productive means of performing tasks, thereby increasing the overall efficiency of an entity. Black and Lynch (1996) proved that the average educational level in companies is positively related to their business efficiency. Moreover, as Appelbaum et al. (2000) suggest, high skills of the employees are a requirement for empowerment and benefit from delayering the company, which in turn is fostered by a strong approach to develop team performance among the employees. As Crawford and LePine (2012) and Mathieu, Maynard, Rapp, and Gilson (2008) state, effective team performance must go in line with the coordination of team members' activities. Synergistic value from teams is difficult for competitors to imitate. Thus sustainable competitive advantage derives more from teams than from individuals (Barney & Wright, 1998). The efficiency and effectiveness of the team's collective learning process are positively influenced by the interaction of team members with each other and, moreover, knowledge and abilities gained by one team member can be transferred to the other team members (Ellis et al., 2003). However, as stated by Chan, Lim, and Keasberry (2003), it is possible only when teams in the firm learn through the sharing of knowledge and experience among individuals.

Human capital (as an intangible resource) is more probable to provide a competitive advantage because it is rare and socially complex, and therefore difficult to copy (Hatch & Dyer, 2004). Also, Groot and Van Den Brink (2000) state that human capital can improve firm performance through its...