Human resource management in U.S. small businesses: A replication and extension

Employees in small firms are frequently the key factor distinguishing successful from unsuccessful ventures. The literature emphasizes the importance of well-motivated, highly skilled workforce as a determinant of a small firm's ability to remain competitive in the contemporary business environment. (e.g., Hodgetts & Kuratko, 2001; Longenecker, Moore, & Petty, 2000). Researchers began to examine the Human Resource Management (HRM) practices of smaller ventures in the early 1990's; however, little subsequent research has appeared. The current study, based upon the responses of 262 owners of small and emerging ventures in the U.S., provides a comparison of HRM practices to those reported in a study conducted at the beginning of 1990.

Background

Human resource management issues in larger firms have received extensive attention within the literature. Topical areas receiving the greatest focus have included the importance of human capital (Stewart, 1992); the impact on performance and turnover (Arthur, 1994); the impact on financial performance (Huselid, 1995); the impact on organizational performance (Delaney & Huselid, 1996; Huselid, Jackson, & Schuler, 1997); and HRM's effect on competitive advantage (Lado & Wilson, 1994; Barney, 1991; Kamoche, 1996). In addition, articles have addressed the critical role of human resource management in regards to the changing environment (Jackson & Schuler, 1995; and Mirvis, 1997), as well as human resource needs for the twenty-first century (Burk, 1997). There has also been an emphasis in the literature on the strategic forms of human resource activities that enable the firm to achieve its goals (Truss & Gratton, 1994; Wright, McMahan, & McWilliams, 1994; Martell & Carroll, 1995; and Wright & Snell, 1998). In addition, the challenges of managing a global workforce have presented a new set of strategic challenges for HRM (Roberts, Kossek, & Ozeki, 1998). Evidence regarding the evolving impact of HRM practices on firm performance, together with assessments of the future prospects for the HRM function in organizations, have led researchers to focus on the relationships and configurations within organizations that lead to optimal human resource architecture (Becker & Gerhart, 1996; Lepak & Snell, 1999).

In spite of the considerable volume and diversity of HRM research, relatively little is understood regarding the HRM-related needs, practices, behaviors and outcomes of smaller ventures. This tendency exists in spite of the fact that the vast majority of businesses in the U.S. today employ fewer than 100 people (U.S. Small Business Administration, 2000). It cannot simply be assumed that research results from larger firms necessarily apply to smaller ventures. In fact, specific research on the HRM practices of smaller ventures has been called for (Purcell, 1993) in order to better assess the needs, concerns, challenges and strategies that will enhance their growth and performance.

At the same time, effective human resource management practices have been shown to be an integral part of the success of smaller businesses (Hornsby & Kuratko, 1990; Smith, 1991; Deshpande & Golhar, 1994; Jones, Morris, & Rockmore, 1995; Wager, 1998). Marlow and Patton (1993) argued that the effective management of human resources is the key to survival for smaller ventures.

One early study of HRM functions in smaller ventures found that areas of accounting, finance, production, and marketing, all took precedence over human resource management (McEvoy, 1984). In many cases, the owner of a small emerging business handles the human resource functions alone. Full-time HRM professionals are typically not employed. Yet, informal approaches to managing human resource issues may be detrimental to a firm's success. Each year there are a large number of failures in smaller firms where managerial incompetence is reported as the major underlying cause (Dun & Bradstreet, 2001). One specific area of managerial incompetence that is frequently cited concerns the handling of employee issues. Included here are ineffective recruitment of personnel, inappropriate selection, poor or nonexistent training, lack of benefits, lack of incentives, inequitable compensation and weak or nonexistent performance appraisal.

Hess (1987) found that owners of smaller ventures ranked HRM practices as the second most important management activity next to general management work. Amba-Rao and Pendse (1985) surveyed the compensation and maintenance practices of 78 small firms. Their study found that most firms lacked any systematic or rational approach in their compensation practices. Little (1986) examined the HRM functions in 275 small firms employing fewer than 100 employees. This study found that typically the owner of a firm with less than 50 employees handled the HRM function, while 62 percent of the firms with 51 to 100 employees had a full-time human resource manager.

Only a handful of HRM studies on U.S. small ventures were conducted in the 1990s. The empirical evidence seemed to suggest that smaller firms were progressing in developing HRM practices and policies. Hornsby and Kuratko (1990) studied 247 smaller ventures and found that firms with under 50 employees had very little in place regarding formal HRM practices; however, firms with 50 to 100 as well as those firms with 101 to 150 employees had similar HRM practices in place. These firms cited the availability of a quality labor pool as the most critical HRM issue. Another basic finding was that company size did significantly affect the use of formalized HRM practices, especially for job analysis, recruitment, compensation, benefits and incentive plans. However, less than half the firms surveyed employed any formal HRM practices.

In a study of Canadian businesses, Ng and Maki (1993) noted a significant difference between large and small firms in their ranking of the importance of HRM functions. Smaller firms rated the retaining, obtaining and identifying functions as most important while large firms rated adjustment, identifying and developing employees as most important. In another Canadian study, Deshpande and Golhar (1994) found that workforce characteristics including firm success, ability to inspect work, worker flexibility, ability to work in groups, and self-discipline were perceived to be more significant to smaller firms. Duberley and Walley (1995) concluded from a study of sixteen international manufacturing firms that there existed a wide variety of HRM practices among firms yet few had developed an integrated set of strategic HRM practices.

Wager (1998) studied the determinants of HRM functions in small Canadian firms and found small percentages of firms using the following practices: formal appraisal (50 percent), sexual harassment policies (35 percent), employee pensions (30 percent), TQM (34 percent), employee assistance programs (21 percent), employee attitude surveys (27 percent), and employee relations (19 percent). The research also showed that firms which emphasized open communication and employee participation were much more likely to have formal HRM procedures.

More recently, Heneman, Tansky and Camp (2000) argued that research into human resource issues in small and medium-sized enterprises has been limited and somewhat disappointing. They further argue that human resource theories must be applied to smaller firms who employ the most workers. Recent research has also included a proposed model for recruitment success in small businesses (Williamson, 2000); the importance of training and group-based incentives on the success of a total quality management strategy (Chandler & McEvoy, 2000); the role of human resource practices in supporting an innovative culture (Chandler, Keller & Lyon, 2000); the preference of venture capitalists to back firms with vice presidents of human resources (Cyr, Johnson & Welbourne, 2000); the importance of "HR value" on the long-term success of a venture (Andrews and Welbourne, 2000); and the importance of firm growth, past HR practices, contractual detail, workforce size, value congruence and service representative-client relations on management satisfaction with Private Employer Organization (PEO) usage (Klaas, McClendon & Gainey, 2000).

The studies cited above looked at specific issues related to the role of HR in firm performance; however, none of the studies actually assessed the extent to which firms were practicing sound HRM procedures. As a result, the current study sought to investigate the current state of human resource management practices in small firms in the U.S. and compare the findings to the Hornsby and Kuratko (1990) study.

Research Method

The sample for this study consisted of 262 smaller ventures located in the Midwest and Southeastern United States. Using surveying methodology similar to McEvoy (1984) and Hornsby and Kuratko (1990), Chamber of Commerce and SBDC directories were utilized to develop a sampling frame. These directories were the same data source used in the Hornsby and Kuratko (1990) study. Probable respondents were contacted and asked to participate. Surveys were then distributed and collected by research assistants. Similar to the Hornsby and Kuratko (1990) study, these smaller ventures were further divided into three size categories based on the theory that a company's human resource practices will become more sophisticated as employment size increases. The first category included the "smallest" firms with companies that had between one and fifty employees. The second category consisted of companies that had between 51 and 100 employees, while the third category included companies with between 101 and 150 employees.

The data were gathered by means of the same 20-item questionnaire as used by Hornsby and Kuratko (1990). The survey investigated each company's demographic background (i.e., type of business, size, number of years in existence, and whether or not a HRM department existed) and HRM practices in five major areas (job analysis and description, recruiting and selection, training, performance appraisal, and compensation (e.g., direct compensation, benefits and incentives). The respondents were asked to not only indicate whether or not they performed a specific HRM practice but also to indicate the frequency of its use and rate its effectiveness (where appropriate). For instance, the venture owners were asked to indicate which selection procedures they used and then rate the effectiveness of the procedure on a five-point Likert scale. The critical issues section of the survey required the small venture owner to rank the top four HRM issues to be dealt with in the next millennium.

Results

The Respondents

Of the 262 smaller ventures surveyed, 22.9 percent, 10.8 percent, 15.7 percent, and 50.6 percent were categorized as manufacturing, wholesale, retail and service small businesses, respectively. Also, 59 percent of the respondents employed 50 or less, 28 percent employed 51 to 100 employees, and 13 percent employed 101 to 150 employees. These demographic findings suggest that the sample does represent a broad range of smaller firms in terms of size and industry type. These companies were involved in many different types of business enterprises, especially in manufacturing, retail, and service. Furthermore, the average number of employees (both hourly and salaried), the average number of job classifications, and the average number of years the company had existed increased as the companies grew in size. In addition, as would be expected, the percentage of companies having a formal human resource department increased as company size increased.

The demographic data are similar to the Hornsby and Kuratko (1990) study. However, there are two noticeable differences between the two samples. The current data is more heavily represented by service industries and has fewer "larger" small businesses (101-150 employees). In general, however, the current sample does provide enough cross-section of industries and size categories to allow for comparison of the human resource practices in small firms. Table 1 provides a summary comparison of the demographic findings of both the current study and the Hornsby and Kuratko (1990) study.

Tables 2 and 3 provide a summary of the specific HRM functions reported by the firms and compares these findings to the Hornsby and Kuratko (1990) study. While the results of the current study generally indicate that little has changed in both the use and effectiveness of human resource practices, there are some changes worth noting. The comparison of usage of HRM practices can be found in Table 2 and the comparison of the effectiveness of selected HRM practices can be found in Table 3.

Significant Differences in Human Resource Management Practices

Fewer of the firms in the current study had a formal human resource department compared to the 1990 study. The percentage of firms using a human resource department declined twp percent, eight percent and 11 percent respectively for the small, medium, and larger small firms.

In the area of job analysis, firms in all three-size categories utilized observation more frequently, followed by interviews and questionnaires. The biggest decline was the use of observation, however, since it fell 17 percent and 11 percent for "small" and "medium-sized" small firms respectively.

Only three changes in recruitment practices between the two studies are worth noting. First, there was a significant decrease in the usage of public employment agencies. Usage fell nine percent, 13 percent and 22 percent for small, medium and large small businesses. Second, small businesses more than doubled their use of private employment agencies with an increase of 37 percent. Third, "medium" and "larger" small businesses increased their use of radio recruiting by more than ten percent. The perceived effectiveness of recruitment methods did not seem to change dramatically.

With regard to employee selection procedures, two major changes in recruiting practices since 1990 were identified. First, there was a modest decline, approximately ten percent, in all size categories in the use of reference checks. Second, there was a dramatic increase in drug testing across all three-size categories. One major change worth noting is the increased rating for effectiveness of drug testing for "small" (by .54) and "medium-sized" (by .97) small businesses.

A few changes in compensation practices appear to have occurred over the past decade. Paying market rates, basing pay on performance appraisals, basing pay on job requirements, and paying for experience were the most popular methods for determining compensation across all three size categories. The only major change was for "medium-sized" small firms where there was a decrease in utilization of job requirements for compensation determination.

Since 1990, three major changes in benefits practices can be noted. First, there was a decline in the use of life insurance programs (13 percent, 19 percent, and 31 percent respectively) for small, medium and larger small firms. Second, there was a general increase in the providing of sick leave to employees (10 percent, 22 percent, and 6 percent respectively) for small, medium and larger small firms. Third, there was an increase in all size categories in the provision of dental insurance to employees (6 percent, 16 percent, and 26 percent respectively).

Appraisal methods for "small" and "medium-sized" small firms did not change significantly over the past ten years. However, "larger" small firms showed an overall decline in the use of all appraisal methods surveyed. Rating scales, narrative essays, and goal setting declined 10 percent, 31 percent, and 22 percent respectively for "larger" small firms. No consistent changes in owner ratings of effectiveness of the various performance appraisal methods are worth noting.

Over the last decade, very little change was found in the use of training practices. The only consistent change found was for the use of seminars. Their use dropped 15 percent, 14 percent and 14 percent for small, medium and large small businesses. One other change worth noting was a 20 percent increase in computer aided instruction for "larger" small firms. The effectiveness of the training methods utilized was also very similar to the earlier study except for computer aided instruction. Its effectiveness increased significantly for all sized categories (by 1.18, 1.18, and 1.00 for small, medium and larger small firms respectively).

Critical Issues of Concern: Then and Now

Beyond examining current use of human resource practices, a comparison was drawn of owner/manager perceptions regarding future human resource trends. Respondents were asked to rank their perceptions of the top five human resource trends for smaller firms. In order to determine the most critical trends or issues for the new millennium, the respondents' answers were weighted in accordance with their rankings on the questionnaire. A number one ranked answer received a weight of four, a number two ranked answer received a weight of three, a number three ranked answer received a weight of two and a number four ranked answer received a weight of one. The weights for each issue were total and a list of the top twelve issues for each size category was constructed.

For the smallest ventures (1-50 employees), the five most important issues were availability of quality workers, benefits, training, competitive wages, and government regulations. As the size of firms increased to the medium category (51-100 employees) the five issues deemed to be most important were benefits, retention, availability of quality workers, childcare, and flexible scheduling. Finally, the largest category (101-150 employees) of small ventures reported the five most important issues as availability of quality workers, benefits, government regulations, with attendance, retention, and wages identical in weighted scores.

The results demonstrate that availability of quality workers and benefits were ranked as the issues of greatest concern in all three-size categories. Then the issues varied from government regulations, training and wages (smallest category) to retention, childcare, and flexible scheduling (medium category), to government regulation, retention and attendance (largest category).

In attempting to identify differences in the critical issues of owners of smaller ventures over the last ten years, Table 4 was developed to illustrate the responses and weighted ranking from the Hornsby and Kuratko (1990) study to the responses and ranking from the current study (using the same methodology).

While the 1990 study demonstrated very little difference in the top five issues throughout all size categories, the current study did identify some variances in issues. It is interesting to note that two issues, availability of quality workers and benefits, were ranked as the most critical issues in all size categories in the current study as well as in the study ten years ago. Thus, it appears that owners of smaller ventures still perceive a need for quality workers as well as a concern over the cost or the ability to offer benefits. The concerns over government regulations and wages still appear on the current lists, as they did ten years ago, indicating the constant pressure of government felt by owners of smaller ventures, as well as the constant pressure of prevailing wage rates. However, the current study introduced childcare, retention, and flexible scheduling as critical issues for the new millennium. These issues were not mentioned ten years ago indicating that changes in the workforce have changed the issues of concern for owners.

Discussion

The results of this study suggest that human resource practices in smaller ventures of all sizes have generally stagnated and even appear to have regressed in some areas over the past decade. Important legislation passed in the 1990s (i.e., American's with Disabilities Act and the Family and Medical Leave Act) and the changing dynamics of the U.S. workforce have not led small firms to increase their human resource emphasis.

It also appears that the types of issues of concern to owners of smaller ventures have not changed significantly over the last ten years. Quality workers, benefits, wages, and government regulations are recognized HRM issues throughout the last ten years regardless of the venture's size. Owners of small ventures have been concerned about the same human resource issues regardless of their size (up to 150 employees). In other words, although the sophistication of the current practices utilized by small ventures is affected by size, the perceived concern over the most important future human resource issues and trends is not affected by size throughout the last ten years. Regardless of size or ability to actually implement the procedures, small venture owners recognize and agree upon the same issues of concern for the new millennium. These findings have both research and practical implications.

From a research/theoretical perspective, very little work exists which establishes propositions for human resource practices in small firms. It seems apparent from this study that any theoretical research assertions made in the recent management literature must only be relevant to much larger firms. Also, most of the research over the last decade in the area of small business human resource practices has been conducted outside the U.S., where laws and cultural differences impede generalization to U.S. small firms. This lack of research on smaller firms and the inability of research on larger firms to transcend to small firm implementation is both puzzling and a cause for concern. Smaller firms, such as those included in this study and the Hornsby and Kuratko (1990) study, account for most of the U.S. businesses and employ most of the U.S. workforce. More research, especially applied research, is required to identify the strategic human resource needs of these firms and to develop models that may impact human resource practice utilization in the firms themselves.

Given that the results of the current study demonstrate human resource practices have either stagnated or declined over the last ten years, the call for more research and applied model building is justified and has also been emphasized by Heneman, Tansky and Camp (2000). As mentioned earlier, recent research has addressed interesting issues such as the importance of HRM for venture capitalists, the role of training and incentives on TQM practices, and the role of HRM practices on innovative cultures. However, only one article has addressed the existence of HRM practices. Klaas, McClendon and Gainey's (2000) assessment of the impact of Private Employer Organizations (PEOs) on HR management recognizes an important issue in small firms that needs much more research. Research questions such as the impact of PEOs on long-term performance, employee retention and satisfaction are yet to be addressed. Another important issue that needs to be addressed is the impact of HRM expertise on firm performance. The impact of such factors as having an existing HRM department or utilizing consulting services (either offered by private consultants or other outside organizations) should also be investigated.

From a practical standpoint, the results of the current study seem surprising when compared to the Hornsby and Kuratko (1990) study. With the regulatory environment posing increasing threats, it would seem logical that during the last ten years there would have been increases and improvements in the HRM functions of smaller firms. However, the opposite is found in the results of this study. Are smaller firm owners still resistant to or ignorant of the growing changes in the human resource environment? Are we, as researchers, failing to deliver the message to the small business sector? Small business owners need to recognize the value in recruiting HRM prepared professionals to develop their policies, programs, and strategies.

At least three other practical suggestions could be made regarding HRM practices in smaller firms. First, small business/entrepreneurship curriculums in colleges and universities should offer more coursework specifically related to HRM issues. As discussed earlier, many HRM issues are different for "small," "medium-sized," and "larger" enterprises. These issues should be given more emphasis so that students understand the important role HRM plays in firm development. Second, consulting services targeted to small firms should increase their emphasis on HRM practices. The research cited earlier suggests that HRM functions including training and incentives are directly related to quality initiatives. This research needs to be translated by these agencies and applied to more smaller firms. Third, professional organizations such as the Society for Human Resource Management (SHRM) need to play a larger role in promoting awareness of the need to focus on developing more sophisticated HRM practices to enhance firm performance. Working as an HRM professional in a small to medium-size firm should be viewed as a positive occupational choice where an individual can have substantial impact by sharing his or her expertise.

Over the next decade, some of the critical issues, as cited by small business owners will continue to include determining benefits, availability of quality workers, training, the impact of government regulations, and competitive wages. In addition, the current study introduced child care, retention, and flexible scheduling as issues of concern for the new millennium. Thus, the need to understand and carefully implement practices in each of these specific areas will continue to expand. More research is needed but it is clear that a greater application of HRM practices in smaller firms is a necessity.