The ‘Suite’ Smell of Success: Personnel Practices and Firm Performance

Throughout the world, we see firms in the same industry in the same country having very different productivity outcomes. We have long been fascinated in why this is the case, and whether management can do anything to place their firm in the top quartile of performers within their industry.

It turns out that management practices are key to firms’ productivity outcomes. But the key is not a simplistic application of performance pay or any other single management practice to the firm; a holistic approach is required. Recent analysis ILR_72ppiRGB_powerpointbased on longitudinal data for New Zealand firms across all sectors of the economy, shows that having in place a suite of complementary high-performance management practices can raise productivity by over 10% for firms that are in the top quartile of management practices. This is the case for firms in manufacturing, services and other sectors. The suite of management practices includes having processes for staff consultation, clear firm values, performance reviews coupled with performance pay, room for autonomous staff decision-making and staff training opportunities. What this means for firms is that there are no ‘magic-bullet’ management practices that can be introduced quickly to transform most firms. Management need to introduce a comprehensive suite of management practices if they wish to raise their productivity to be in the top rung of firms.

The authors use a panel of more than 1,500 New Zealand firms, from a diverse range of industries, to examine how the adoption of human resource management (HRM) practices affects firm performance. The panel is based on managerial responses to mandatory surveys of management practices in 2001 and 2005 administered by the national statistical office, linked to objective longitudinal firm performance data. The authors find that, after controlling for time-invariant firm characteristics and changes in a wide range of business practices and firm developments, a suite of general HRM practices has a positive impact on firm labor and multifactor productivity. Conversely, these practices tend to have no effect on profitability, in part because the adoption of performance pay systems raises average wages in the firm.

Citation

Fabling, Richard and Arthur Grimes. 2014. "The ‘Suite’ Smell of Success: Personnel Practices and Firm Performance" IRL Review 67(4)