CIPD - The people and performance link

Corporate and HR strategy

May 2007

This factsheet gives introductory guidance. It:

summarises the findings of our extensive research into the link between people management and business performance
outlines our people and performance model
demonstrates the important role of line managers
reviews the contextual issues of vision and values
considers the particular issues of managing knowledge workers
includes the CIPD viewpoint.

The context

One of the most important lessons of the twentieth century has been that economic progress doesn't necessarily translate into human development. Indeed progress, at least in the short term, has often been made to the detriment of humans and the environments in which they live. However, during the last decade it has become apparent that intellectual understanding, knowledge and the ability to apply that knowledge is the fuel for global competitiveness and growth. Increasingly companies are reliant on the knowledge and competence of the people who work for them as a source of competitive advantage. As they learn to their cost that all other forms of advantage, such as product innovation, capital utilisation and market expansion can be easily replicated by their competitors, the question of how to attract, retain, motivate and manage people has become a major focus of attention.

Against this background, CIPD identified the issue of the link between people management and business performance as a flagship research project. Development work began in 1997 to design a programme of research that would best suit the needs of the profession and develop existing knowledge in the area. At that time, evidence existed which suggested there was a positive correlation between the number of initiatives to manage people and business performance. But no one had yet proved that people management caused the performance improvement. So the argument prevailed that such a correlation existed because high-performing firms could afford people management, and not that people management caused high performance.

The CIPD research programme

Our research programme established three areas of activity:

to improve the evidence available and establish the direction of causality
to study the dynamics of the relationship and improve understanding of how it works in practice
to translate the wealth of academic material into accessible information for practitioners.

As a result, we worked with a range of academics and practitioner groups to produce large-scale survey work, detailed case studies and practical advice. The formal programme came to an end in 2003 and resulted in a number of reports and documents, some of which are summarised below. See the reference list below and our research pages for more information.

Go to our research pages on people management and business performance

People management’s impact on business performance

The first piece of work we published came from the Sheffield Effectiveness Programme¹. It was a study, undertaken by Sheffield University, of the causes of differences in productivity and profitability in manufacturing companies over a ten-year period. A positive relationship was identified between employee attitudes, organisation culture, HRM practices and company performance. Two sets of personnel and development practices were seen as being particularly significant:

those concerned with the acquisition and development of employee skills (including selection, induction and the use of appraisals)
those concerned with job design (including skill flexibility, job responsibility, variety and the use of formal teams).

Significantly, this research found that the management of people had a greater effect on performance than business strategy, research and development, quality or technology, which until now were thought to be the main drivers of performance.

A review of the literature² questioned the notion that there would be a particular set or ‘bundle’ of practices that would always bring about performance improvement. The authors described three main approaches to the development of people and development strategies into which the research could broadly be categorised.

The 'best practice' approach - based on the belief that there is a set of superior HRM practices which, if adopted, will lead to better business performance. Perhaps the best known set is Pfeffer’s list of the seven HR practices of successful organisations: employment security, selective hiring, self-managed teams, high compensation contingent on performance, training, reduction of status differentials and sharing information³. But it is difficult to accept that there is any such thing as universal best practice. What works well in one organisation won't necessarily work well in another because it may not fit its strategy, culture, management style, technology or working practice.
The 'best fit' approach - based on the belief that there can be no universal prescriptions for HRM policies and practices. It is all contingent on the context and culture of the organisation.
The 'configurational' approach - which focuses on the need to achieve horizontal or internal fit. This is the concept of 'bundling' personnel and development practices together. MacDuffie explains that implicit in the notion of a ‘bundle’ is the idea that practices within it are interrelated and internally consistent, and that ‘more is better’ with respect to the impact on performance because of the overlapping and mutually reinforcing effect of multiple practices⁴.

Effective people management

CIPD contributed to the Future of work survey carried out by Guest et al⁵ which was primarily funded by the Economic Science Research Council. Conducted in 2000, this telephone survey covered 835 private sector organisations. It was the first large-scale survey of this kind in the UK and established that a larger number of ‘progressive’ HR practices, and particularly the efficiency and effectiveness of their application, are associated with higher levels of employee commitment and quality and greater flexibility. These are in turn associated with higher levels of productivity and quality of goods and services and hence financial performance. Although it stops short of proving causality, this work identified a distinct link between HRM, employee attitudes and behaviour and corporate performance.

Understanding the people and performance link

The final and largest research investigation in the CIPD programme was that carried out by a research team led by Professor John Purcell at Bath University and led to our report Understanding the people and performance link: unlocking the black box⁶. This work studied a total of 18 organisations over a three-year period, with six of the organisations being in the knowledge-intensive sector. In each organisation the team focused on a clearly identifiable unit of the business, such as a store or pair of stores within a large retail organisation or the sales team in a financial services organisation. They conducted extensive interviews with front-line employees to collect data on their attitudes, levels of commitment, views about their job, team and reporting relationships. Their brief had been to investigate in depth the relationships between practice and performance to develop understanding of the nature and mechanics of this relationship. Analysis of this data enabled them to develop the People and Performance model which appears in the report itself and is reproduced on page 5 of the report summary called Sustaining success in difficult times.

Go to the summary of Sustaining success in difficult
times

The model demonstrates that people management practices in themselves do not create value. They do, however, create the building blocks of performance: ability, motivation and opportunity (AMO):

Ability is the assumption that people want to apply for jobs, have their attributes recognised and are willing to learn new skills.
Motivation assumes that people can be motivated to use their ability in a productive manner.
Opportunity assumes people will perform well, engage in high-quality work and participate in wider activities such as team initiatives or problem-solving if they are given the opportunity to do so.

It is these AMO factors that contribute to feelings of job satisfaction, commitment and motivation in employees which encourage them to exhibit discretionary behaviour. Discretionary behaviour means making the sorts of choices that often define a job, such as the way the job is done – the speed, care, innovation and style of delivery. This behaviour is at the heart of the employment relationship, because it is hard for the employer to define, monitor or control. Whatever controls or sanctions the organisation employs it will still lie within the employee’s power to either give or withdraw discretionary behaviour. It is therefore discretionary behaviour that drives performance and makes the differences between organisations that are 'OK' and those that are ‘great’.

However AMO in itself will not necessarily give rise to increased levels of performance. For AMO to be translated into business performance a number of other factors are important and must feature in the design of HR practices.

The role of front line managers

The research identified a number of important issues and messages that have been further analysed: the most notable of these was the role of front-line manager. The role of the first level supervisor is crucial to the effectiveness of HR practice because although HR design HR practices, it is the front-line managers who implement and bring them to life. The research found that the role of the front-line manager is the most important factor explaining the variation in both job satisfaction and discretionary behaviour and one of the most important factors in developing organisational commitment. Front-line managers can both permit and encourage people to be responsible for their own jobs, but they can also stifle employee performance through controlling or autocratic behaviour.

Organisational culture and values

The research also found that for the relationships between practice and performance is significantly influenced by the organsiational context or environment. Again, this was one of the issues which merited further analysis⁷ and we found that one of the keys to the HR–performance link is the existence of a ‘big idea’ or a clear mission underpinned by values and a culture expressing what the organisation stands for and is trying to achieve. The existence of a big idea was strongly linked to employee commitment. There are five key attributes to the big idea: it is embedded, connected, enduring, collective, and measured and managed. The big idea therefore means more than just having a formal mission statement. It means that the values are spread throughout the organisation so that they are embedded in policies and practices. These values interconnect the relationships with customers (both internal and external), culture and behaviour, and provide the basis on which employees should be managed.

Managing the careers of professional knowledge workers

Another factor identified by the research is the management of professionals⁸. The management of knowledge workers in particular presents organisations with three key dilemmas:

the retention/employability dilemma - where the organisation needs to retain its key human capital in order to compete in the fast-changing knowledge market, while the knowledge workers seek to keep their skills fresh by frequently moving between employers and gaining new experience
the development/focus dilemma - where the organisation wants to develop organisation-specific skills in order to better retain key skills – sometimes referred to as golden handcuffs – but knowledge workers want to develop transferable skills to remain in control of their own development plans
the value/appropriation dilemma - where both the organisation and its workers lay claim to the value captured from the knowledge-creation process. Knowledge-intensive firms can only remain competitive when they manage to capture a significant proportion of the value generated from their employees’ knowledge and skills. Knowledge workers likewise seek to demand high salaries and other benefits because they believe that the service/product delivery is intimately linked to their particular intellectual capital.

Where individuals get their primary source of satisfaction - from working with the team, from customers, the organisation or their individual professional status - is important. The research challenges the notion that identification with the customer or the team is always positive. It argues that too close an identification with the customer may lead to individuals pursuing customer needs, which is detrimental to organisational value. Similarly, strong team identification may be positive for the individuals but may cause problems for the organisations if individual team members leave.

CIPD viewpoint

The results of our research leave little doubt that people management does make a significant contribution to organisational performance. However, it also demonstrates that the relationship between people management and performance is complex and ready-made solutions or prescriptive approaches are of little value. Organisations that are able to successfully assess their people management activity against the people and performance model and identify gaps and areas for improvement are likely to be able to achieve significant gains. Once the research was completed, we developed a set of tools⁹ using the research methodology to equip practitioners to do just that.

Our further work on human capital is continuing to develop this research and demonstrates the contribution of HR processes to concerting human capital into organisational value¹⁰.

References

PATTERSON, M., WEST, M.A. and LAWTHOM, R. (1997) Impact of people management practices on business performance. Issues in people management. London: Institute of Personnel and Development.
RICHARDSON, R. and THOMPSON, M. (1999) The impact of people management practices on business performance : a literature review. Issues in people management. London: Institute of Personnel and Development.
PFEFFER, J. (1994) Competitive advantage through people: unleashing the power of the workforce. Boston: Harvard Business School.
MACDUFFIE, J.P. (1995) Human resource bundles and manufacturing performance: organizational logic and flexible production systems in the world auto industry. Industrial & Labor Relations Review. Vol 48, No 2, January. pp197–221.
GUEST, D.E., MICHIE, J. and SHEEHAN, M. (2000) Effective people management: initial findings of the Future of Work study. Research report. London: Chartered Institute of Personnel and Development.
PURCELL, J., KINNIE, N. and HUTCHINSON, S. (2003) Understanding the people and performance link: unlocking the black box. Research report. London: Chartered Institute of Personnel and Development. Available at: http://www.cipd.co.uk/bookstore
PURCELL, J., HUTCHINSON, S. and KINNIE, N. (2004) Vision and values: organisational culture and values as a source of competitive advantage. Executive briefing. London: Chartered Institute of Personnel and Development. Available at: http://www.cipd.co.uk/bookstore
SWART, J. and KINNIE, N. (2004) Managing the careers of professional knowledge workers. Executive briefing. London: Chartered Institute of Personnel and Development. Available at: http://www.cipd.co.uk/bookstore
All our tools are available to CIPD members at http://www.cipd.co.uk/tools
KINNIE, N., SWART, J., and LUND, M. (2006) Managing people and knowledge in professional service firms. Research report, London: Chartered Institute of Personnel and Development. Available at: http://www.cipd.co.uk/bookstore

The people and performance link