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Hrm as a source of shareholder value

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  • 1. HR as a Source of Shareholder ValueAdvait Bhobe, Shalibhadra Jain, SiddharthPadki Padki, Ragini Bhaia, LokeshKumar Merugupala, Sagar DariraIntroduction Human resource management (HRM or simply HR) is the management of an organizationsworkforce, or human resources. It is responsible for the attraction, selection, training, assessment, andrewarding of employees, while also overseeing organizational leadership and culture, and ensuringcompliance with employment and labor laws.Traditional View of HRM HRM is generally considered as "Salaried model". The traditional approach to HRM was designedon the basis of blue collared people i.e. workers of the factory or industry. Workers have muchautonomy as they can deviate from written policy & rules & regulations. Workers also have thebargaining power which gives them opportunity to negotiate regarding certain points like pay scale,promotion etc. Sometimes the group of workers also forms their trade circle so that it can enjoy theirbargaining powers. Traditionally HRM had the following roles and responsibilities.Focus on Functional Activities & Process Orientation  HRM focuses on Human resource planning, Training & Development, Compensation Planning, Selection, maintaining Employee relations, performance appraisal, etc.  It also focuses on establishing policies, procedures, rules & regulations, motivating employees monetarily & non-monetarily to do better in their job by using their skill & also enhancing their skills too in order to achieve the goals of the organization set by their superiors & even excelling the organizational goals.  HRM also includes supervising & controlling the activities of employees but giving them freedom in their thought process & innovative ideas. If the employees break the rules & regulations then they are either punished or charge fines.1|P ag e HRM as a Source of Shareholder Value, Section - B
  • 2. Reconciliation between Management & Workforce  HRM also plays the major role in reconciling the interest between Workforce & Management which would be good for the future & success of any organization.  As the goals of management & workforce is same i.e. success of organization, it helps in reconciling between Management & Workforce. But if there is conflict between two then reconciling becomes difficult.  HRM is generally considered as Staff functions & is responsible for Human Resource Development.Current view point on HRM Earlier HRM was considered as Cost function but with the return to real-world economics afterthe unwinding of the 1990s and bursting of the tech bubble HRM gained ground and considered asstrategic function for the organization. New approach says that “it is the quality of a companys peoplemanagement that determines its real success or failure.” HRM develops and manages these peopletherefore it can transform the crisis into opportunity. These are some new concepts adopted by HRM toretain the most important asset of any company “Employee”.Work Environment A safe and happy workplace makes the employees feel good about being there. Each one is givenimportance and provided the security that gives them the motivation and incentive to stay. This isusually achieved through internal surveys to find out whether they are satisfied and if not what theythink needs to be changed. HR manager should make sure that employees get a good and healthy workenvironment.Open Management Employees don’t like the feeling of being kept in the dark about what is happening in the company.They feel motivated and develop enthusiasm only when the management opens up to them anddiscusses the company policies, sales, clients, contracts, goals and objectives. This encouragesparticipative management. Asking them for ideas on how to improve will get their creative juicesflowing. Being open about everything related to the company will help in building trust and motivatingthe employees. This open management policy can be practiced using several tools.2|P ag e HRM as a Source of Shareholder Value, Section - B
  • 3. Performance Incentives Every good performance is appreciated in the form of a pat on the back, bonuses or giving someother compensation for a job well done. Organizations that struggle to keep up with the attrition rateare mostly those that think employees are “just” doing their job. Even if it is the employee’s job,completion in an appreciable manner calls for an incentive, and this goes a long way in boosting the staffmorale. These incentives can be implemented at the individual as well as the team level and it has beenseen that this works wonders in getting the best out of the employees. But it is important to keep inmind that these bonuses should not be given without a reason, unless it is a commitment for annualbonuses or some such thing. Doing so will only reduce the perceived value of the bonuses.Performance Feedback This is one the methods that is being followed by many organizations. Feedback is not only takenfrom the boss, but also from other seniors and subordinates. Previously, appreciation was only soughtfrom the immediate boss or the management, but now organizations understand the importance ofcollecting performance feedback from several quarters. The opinion of everyone matters, especially forsomeone who is in a leadership role at any level. Each person in the team is responsible for givingconstructive feedback. This kind of system helps in identifying people who can perform well as leadersat higher levels in the organization. Even the senior level managers can use this system to theiradvantage, as a tool to improve themselves.E.g. 360 degree feedback is a new and fast way to give performance feedback.Employee Evaluation Every company has an employee evaluation system in place but a good system links individualperformance to the goals and priorities of the organization. This works well when achievements aretracked over a year. For a fair review of each employee, the evaluation, apart from being done by theboss, should be done by another person at a higher level, for whom the employee’s contribution isimportant. Ratings can also be obtained by other employees. This ensures a fair and accurate rating ofeach and every employeeSharing of Knowledge Knowledge sharing is a wonderful strategy that helps in the betterment of the employees and theirwork. Keep all the knowledgeable information in central databases that can be accessed by each andevery employee. For example, if an employee is sent on some training, the knowledge that is acquired3|P ag e HRM as a Source of Shareholder Value, Section - B
  • 4. by that employee can be stored in these databases for others to learn from it. Even innovative ideas thatthe management deems fit for employees to see, can be stored here for all to see.Publicize Good Performances Every company has some employees who outperform others. Such performances should behighlighted and displayed where other employees can look at them; such as on the display boards andintranet etc. This will encourage others to give their best. A proper system should be set up to make alist of high performances at specific times in a year.HRM as competitive advantage to the organization Earlier patents, economies of scale, market regulation all are considered as competitiveadvantages, but these are not relevant in current economic environment. Instead, the corecompetencies are capabilities of employee to develop new product, provide better services to thecustomer and implement the strategies of the organization. HRM manage develop and sustain thesekind of invisible asset of the organization and become a competitive advantages.Implementing a Strategy Any business that wants to remain successful must continually assess and formulate newstrategies to meet the needs of its customers in more effective ways. It is important that employees beinformed about the organizations strategic mission. HRM practices should be the mechanisms used tofocus peoples attention on the major strategic issues in the organization i.e. altering the HRM practicesto meet their strategic goals. As an example, a differentiation strategy calls for specialists in productdesign and development, higher budgets for research and development, rewards for innovative ideasrelated to quality, and customer-based performance appraisal.Dealing with Change In an increasingly competitive environment, organizations with a greater capacity for change aremore likely to satisfy, retain, and attract customers. In organizations, the capacity to change may beincreased by using HRM tools correctly. As an example, hiring people who are flexible and develop4|P ag e HRM as a Source of Shareholder Value, Section - B
  • 5. people that they will realize that change is an important part of growth. Moreover, performancestandards should be set to encourage flexibility and diversity and should reward employees’ innovative.Building Strategic Unity Strategic unity represents the extent to which stakeholders inside (e.g. employees) and outsidea business (e.g. customers) share a core set of values and assumptions about the business. As anexample, if the stakeholders believe that customer service is of central importance to corporateperformance, this core values can be developed and nurtured among employees, suppliers andcustomers of the business. The benefit of the internal quality is that it channels employees attentiontoward an important organizational goal e.g. helps the company to provide a unique service tocustomers that cannot easily be copied by competitors.Human Capital Management (HCM) Human capital management (HCM) is an approach to employee staffing that perceives people asassets (human capital) whose current value can be measured and whose future value can be enhancedthrough investment. An organization that supports HCM provides employees with clearly defined andconsistently communicated performance expectations. Managers are responsible for rating, rewarding,and holding employees accountable for achieving specific business goals, creating innovation andsupporting continuous improvement.Two competencies required for Human Capital Management 1. Professional HRM Capabilities - these are related to the delivery of traditional HR activities such as recruiting, selection and compensation 2. Business related capabilities - reflect the understanding of business and implementation of competitive strategy.The HCM should look at the following with special attention. 1. HR must focus on business level outcomes rather than HR level inputs-The number one priority for value creating HR function is to develop the value creating HR is to develop the perspective and competency to solve business problems.HR makes a difference when it can point to human capital problems that limit the ability of a firm to achieve important business priorities and can provide HR solutions to those problems5|P ag e HRM as a Source of Shareholder Value, Section - B
  • 6. 2. HR must become a strategic core competency rather than a market follower - A high performance work system that creates real shareholder value is not a commodity that can be benchmarked from other organizations. Benchmarking, might keep you in the game but it will not provide the intellectual capital to create sustained competitive advantage. 3. Strategic competencies are more important than functional competencies - It is the ability to understand the human capital dimension of each of the businesses key priorities and be able to communicate how solving human capital problems will improve the operating performance of the business. 4. The most important missing element in HR functional expertise is systems perspective - Functional competencies must blend traditional HR functional expertise with systems perspective to avoid deadly combinations and identify powerful connections.Intangibles in Human Resources ManagementEvolution of Intangibles Before 1990, 75% - 90% of a firm’s market value could be predicted by its own financialperformance. Since 1990, however this figure has dropped down to near 50% in both bullish and bearishmarket conditions. It leads to a conclusion that market value of a firm is no longer determined byfinancials alone. Rest of the 50% value is determined by a thing known as ‘intangibles’ – a term coinedby the financial community. The concept of intangible is relatively new in HRM study and marks a majorshift in way a firm is to be values. Intangible are represented by means of choices that are derived /tapped internally within an organization, how investors value such decision apart from the traditionalphysical assets. Organizations and its people form the intangible asset which translates into investorconfidence, tangible earnings improvement. Corporate leaders and investors understand only onelanguage – the language of finance and accounts. It is the HRM function that carries out the arduoustask of presenting the intangibles in financial terms.Architecture of Intangibles It is a technique proposed by modern day HRM guru Dave Ulrich that would aim at improvingorganizations intangibles. Starting from the bare essentials at level 1 into more intricate and complexareas of HRM is nothing but ‘Architecture for Intangibles’.6|P ag e HRM as a Source of Shareholder Value, Section - B
  • 7. Level Area of focus Action outcome1 Keep promises Build reputation among stakeholders for delivering what you promise to deliver.2 Anticipate future Define growth strategy , manage trade offs in customer while investing in intimacy, geographic expansion to achieve growth present3 Put money where Provide full support to current capabilities , build strategy is competencies in R&D, sales and alike.4 Build value through Develop capabilities of shared mindset, talent, leadership organization and and alike throughout the organization. people  It’s progressive and sequential wherein all the level follow in ordered manner one after the.  Each level could involve HR practices that would help leaders foster truest and promote learning and communication amongst internal shareholders viz. employees which eventually results in better productivity and better investor sentiment owing better performance of company.  It essentially increases the likelihood of evoking behaviors that would engage and delight external shareholder. Level 1 - The organization build a solid reputation by doing what it promised to do and keeping its promises. This helps in bringing a lot of credibility for the firm which gives the firm lot of confidence. Level 2 – As a company gains credibility, it begins charting out growth strategy and becomes mature enough to manage tradeoffs in customer intimacy, geographical expansion to achieve desired growth. Level 3 – Provide full support towards development of core competency such as sales marketing, R&D, etc. that is essential in success of any company. Level 4 – Develop the intangibles such as capabilities of shared mindset, talent, speed and others throughout the organization. It is at level 4 of the architecture, where HR really brings a lot of value at the table. It defines and creates capabilities as intangibles. Recently, studies of organizations have proved that there is greater emphasis on capabilities than structure and processes. The deliverables of7|P ag e HRM as a Source of Shareholder Value, Section - B
  • 8. the HR function is organization’s capabilities. These capabilities enhance investor confidence in future earnings and have the ability to increase/decrease market capitalization. Huselid, Becker, Beatty found that firms with speed, talent, learning, shared mindset , innovation and accountability capabilities significantly outperformed lower capability firms in productivity, profitability and shareholder value. Firms differ so much that no one can produce a single magical list of ideal and pre requisite capabilities. Qualities such as efficiency, talent, collaboration are ‘not the only’ capabilities may require but they do gives us a broad sense about the types of capabilities that makes intangibles tangible. These delight the shareholders, customers; engage employees; establish reputation amongst investor community and provide a means of sustaining long term sustainable growth. HR professionals can play the role of architects and thought leaders in defining and creating each of such capabilities.Intangibles Audit An intangibles audit measures how well intangibles are being delivered and usually leads to anaction plan for improvement. An intangible audit is usually a self-assessment type of audit which helpsHR Leaders evaluate the four core dimensions: keeping promises, growth strategy, core competence,organization capabilities.A sample Question from intangible audit:Level 1: Keeping Promises a.) To what extent do we keep promises to investors by delivering consistent and predicatable earnings? 1 2 3 4 5 (1 – low, 5 – highest)Level 2: Growth StrategyTo what extent do our decisions align with primary growth strategy? 1 2 3 4 5 (1 – low, 5 – highest)Many organizations have adapted this template to yield productive results. HR professionals can beprime movers for these audits as they collaborate with other staff experts and prepare information forbusiness leaders.8|P ag e HRM as a Source of Shareholder Value, Section - B
  • 9. High Performance Work System A high-performance work system (HPWS) can be defined as a specific combination of HRpractices, work structures, and processes that maximizes employee knowledge, skill, commitment, andflexibility. Although some noteworthy HR practices and policies tend to be incorporated within mostHPWSs, it would be a mistake for us to focus too much, or too soon, on the pieces themselves. The keyconcept is the system. High-performance work systems are composed of many interrelated parts thatcomplement one another to reach the goals of an organization, large or small. The notion of high-performance work systems was originally developed by David Nadler to capture an organization’s “architecture” that integrates technical and social aspects of work. Edward Lawler and his associates at the Center for Effective Organization at the University of Southern California have worked with Fortune 1000 corporations to identify the primary principles that support high-performance work systems. There are four simple but powerful principles: 1. Shared information 2. Knowledge development 3. Performance–reward linkage9|P ag e HRM as a Source of Shareholder Value, Section - B
  • 10. 4. EgalitarianismIn many ways, these principles have become the building blocks for managers who want to create high-performance work systems. More important, they are also quickly becoming the foundation for currenttheories of human resources management.The Principle of Shared Information The principle of shared information is critical for the success of empowerment and involvementinitiatives in organizations. In the past, employees traditionally were not given—and did not ask for—information about the organization. People were hired to perform narrowly defined jobs with clearlyspecified duties, and not much else was asked of them. One of the underlying ideas of high-performancework systems is that workers are intimately acquainted with the nature of their own work and aretherefore in the best position to recognize problems and devise solutions to them. Today organizationsare relying on the expertise and initiative of employees to react quickly to incipient problems andopportunities. Without timely and accurate information about the business, employees can do littlemore than simply carry out orders and perform their roles in a relatively perfunctory way. They areunlikely to understand the overall direction of the business or contribute to organizational success. On10 | P a g e HRM as a Source of Shareholder Value, Section -B
  • 11. the other hand, when employees are given timely information about business performance, plans, andstrategies, they are more likely to make good suggestions for improving the business and to cooperatein major organizational changes. They are also likely to feel more committed to new courses of action ifthey have input in decision making. The principle of shared information typifies a shift in organizationsaway from the mentality of command and control toward one more focused on employee commitment.It represents a fundamental shift in the relationship between employer and employee. If executives do agood job of communicating with employees and create a culture of information sharing, employees areperhaps more likely to be willing (and able) to work toward the goals for the organization. They will“know more, do more, and contribute more. “ At FedEx Canada, at every single station across Canada,company officers and managing directors meet with employees at 5:30 a.m. and 10:00 p.m. to reviewthe business data and answer questions.The Principle of Knowledge Development Knowledge development is the twin sister of information sharing. As Richard Teerlink, formerCEO of Harley-Davidson, noted, “The only thing you get when you empower dummies is bad decisionsfaster.” Throughout this text, we have noted that the numbers of jobs requiring little knowledge andskill is declining while the number of jobs requiring greater knowledge and skill is growing rapidly. Asorganizations attempt to compete through people, they must invest in employee development. Thisincludes both selecting the best and the brightest candidates available in the labor market and providingall employees opportunities to continually hone their talents. High-performance work systems depend on the shift from touch labor to knowledge work .Inthe contemporary work environment, employees must learn continuously. Stopgap training programsmay not be enough. Companies such as DaimlerChrysler and Roche have found that employees in high-performance work systems need to learn in “real time .The Principle of Performance–Reward Linkage A time-tested adage of management is that the interests of employees and organizationsnaturally diverge. People may intentionally or unintentionally pursue outcomes that are beneficial tothem but not necessarily to the organization as a whole. A corollary of this idea, however, is that thingstend to go more smoothly when there is some way to align employee and organizational goals. Whenrewards are connected to performance, employees naturally pursue outcomes that are mutuallybeneficial to themselves and the organization. When this happens, some amazing things can result. Forexample, supervisors don’t have to constantly watch to make sure that employees do the right thing.But in fact, employees may go out of their way—above and beyond the call of duty, so to speak—to11 | P a g e HRM as a Source of Shareholder Value, Section -B
  • 12. make certain that co-workers are getting the help they need, systems and processes are functioningefficiently, and customers are happy. At Clearwater Seafood’s, a global Canadian company of 2200employees based in Bedford, Nova Scotia, nearly all employees participate in a bonus plan based on thevolume of food that is packaged. Connecting rewards to organizational performance also ensuresfairness and tends to focus employees on the organization. Equally important, performance-basedrewards ensure that employees share in the gains that result from any performance improvement. Forinstance, Lincoln Electric has long been recognized for its efforts in linking employee pay andperformance.The Principle of Egalitarianism People want a sense that they are members, not just workers, in an organization. Status andpower differences tend to separate people and magnify whatever disparities exist between them. The“us versus them” battles that have traditionally raged between managers, employees, and labour unionsare increasingly being replaced by more cooperative approaches to managing work. More egalitarianwork environments eliminate status and power differences and, in the process, increase collaborationand teamwork. When this happens, productivity can improve if people who once worked in isolationfrom (or in opposition to) one another begin to work together. These four principles—shared information, knowledge development, performance–rewardlinkage, and egalitarianism—are the basis for designing high-performance work systems. Theseprinciples help us integrate practices and policies to create an overall high-performance work system.12 | P a g e HRM as a Source of Shareholder Value, Section -B
  • 13. Evaluating the Success of the System Once high-performance work systems are in place, they need to be monitored and evaluated overtime. Several aspects of the review process should be addressed. First, there should be a process auditto determine whether the system has been implemented as it was designed and whether the principlesof high-performance work systems are being reinforced. Questions such as the following might beincluded in the audit:  Are employees actually working together, or is the term “team” just a label?  Are employees getting the information they need to make empowered decisions?  Are training programs developing the knowledge and skills employees need?  Are employees being rewarded for good performance and useful suggestions?  Are employees treated fairly so that power differences are minimal?Second, the evaluation process should focus on the goals of high-performance work systems. Todetermine whether the program is succeeding, managers should look at such issues as the following:  Are desired behaviors being exhibited on the job?  Are quality, productivity, flexibility, and customer service objectives being met?  Are quality-of-life goals being achieved for employees?  Is the organization more competitive than in the past?Outcomes of High Performance Work Systems When implemented effectively, high performance work systems benefit both the employeesand the organization. Employees have more involvement in the organization, experience growth andsatisfaction, and become more valuable as contributors. The organization also benefits from high productivity, quality, flexibility, and customersatisfaction. These features together can provide an organization with a sustainable competitiveadvantage.Accounting in HRM Unlike conventional assets human resource cannot be seen in the balance sheet of the firm. It isthe present value of future cash inflow of the firm. There is no scientific method to measure theseintangible assets of the firm.13 | P a g e HRM as a Source of Shareholder Value, Section -B
  • 14. Watson Wyatts 2002 Human Capital Index Watson Wyatts 2002 Human Capital Index (HCI) study shows that superior human resourcespractices are not only correlated with improved financial returns, they are, in fact, a leading indicator ofincreased shareholder value. The year-long study, a follow-up to the firm’s landmark HCI study in 1999,reports that companies with the best HR practices provided a 64 percent total return to shareholders(TRS) over a five-year period, more than three times the 21 percent TRS for companies with the weakestHR practices.The study confirmed a positive correlation between the quality of a company’s HR practices and itseconomic results. But it left unanswered the question whether effective HR practices drive positivefinancial results — or whether successful companies simply have more resources to invest in HRprograms," says Bruce Pfau, head of organization effectiveness consulting at Watson Wyatt and authorof the study. "Evidence from this new research clearly favors superior human capital management as aleading — rather than lagging — indicator of improved financial outcomes."The HCI study is based on a comprehensive survey of human resources practices at 750 North Americanand European companies with a track record of at least three years of total returns to shareholders(TRS), 1,000 or more employees and a minimum of $100 million in revenues or market value. The surveydata is matched to objective financial measures of a company’s worth, including its market value, three-and five-year TRS, and its Tobin’s Q, which measures a company’s ability to create economic valuebeyond its physical assets. Based on this analysis, each company is given a Human Capital Index score ona scale of 0 (low) to 100 (high).Leading or Lagging Indicator? To determine which way the relationship between HR practices and financial performance trulyruns, Watson Wyatt compared two different correlations using HCI scores and financial data for 51companies that participated in both the 1999 and 2001 HCI studies. The study first looked at the correlation between 1999 HCI scores and 2001 financialperformance. This correlation suggests the degree to which human capital management is a "leading"indicator of future financial success. The study also looked at the opposite effect — that is, thecorrelation between 1999 financial outcomes and 2001 HCI scores. This correlation looks at the degreeto which good human capital practices are simply a function of financial success — in other words, a14 | P a g e HRM as a Source of Shareholder Value, Section -B
  • 15. "lagging" indicator. The analysis shows that the first, "leading," correlation is very significant (.41) from astatistical perspective. Moreover, the "leading" correlation is twice as great as the "lagging" correlation(.19). "The difference between the two correlations is comparable to the difference between a battingaverage of .410 and an average of .190," says Pfau. "The bottom line is that effective human capitalpractices drive business outcomes more than business outcomes lead to good HR practices." The HCI study also shows precisely which HR practices find their way to the bottom line,identifying 43 specific HR practices that play the greatest role in creating shareholder value. Accordingto the study, a significant improvement in all practices is associated with a 47 percent increase in marketvalue. The 43 practices are divided into five key areas, and the research quantifies exactly how much animprovement in each area is expected to increase a company’s market value.HCI DimensionExpected Change in Market Value Associated with a Significant Improvement in HCI DimensionTotal Rewards and Accountability 16.5%Collegial, Flexible Workplace 9.0%Recruiting and Retention Excellence 7.9%Communications Integrity 7.1%Focused HR Service Technologies 6.5%Total = 47.0%15 | P a g e HRM as a Source of Shareholder Value, Section -B
  • 16. BENEFITS OF HR SYSTEMRecruitment and Training This is one of the major responsibilities of the human resource team. HR managers come upwith plans and strategies for hiring the right kind of people. And if any missing skill is required - atraining program is designed. In this way, the enhanced skills will help improve the revenue for thecompany.Performance Appraisals HR encourages the people, to work according to their potential. HR personnel give suggestionsthat can help people to bring about their improvement. When taken on a regular basis, motivate theemployees and results in improved performance for the employee which will inturn benefit theemployer.Maintaining good Work Atmosphere This is the vital aspect of HR, because this affects the individual work atmosphere or workculture. Good working condition will help bring out the best in an employee which will result jobsatisfaction and increase in the output of an individual.Managing Disputes In an organization, there are several issues on which disputes may arise between the employeesand the employers. The human resource department acts as a consultant and mediator to sort out thoseissues in an effective manner. Such an environment without any issues will help in improving theperformance of an individual, thus enhancing the revenue of the company.16 | P a g e HRM as a Source of Shareholder Value, Section -B
  • 17. Developing Public Relations The HR department is responsible for organizing business meetings, seminars and variousofficial gatherings on behalf of the company in order to build up relationships. HR department also playsan active role in preparing the business and marketing plans for the organization. Good Public Relationsimprove the chance to attract new talent, new investors and improve relationship with the existingemployees and investors.HR as a Value to Shareholders Top management of the firm take business and strategic decisions to design an HR managementsystem which focuses on employee skills, employee motivation, job design and work cultures whichleads to an increase in productivity, creativity and discretionary effort by the employees. Due to this,there is an increase in overall profit and growth of the company, which increases the share price of thefirm in the company. This is how shareholders worth increases in the firm.Linking HR Strategy to Shareholders Value The most important question that needs to be answered is that are the decision-makers in theorganization aware of the link between human resource planning and profits?17 | P a g e HRM as a Source of Shareholder Value, Section -B
  • 18. Some firms in negative growth choose to lay off thousands of employees so that profits andshare price increase immediately. Consider an example of Mastek Ltd., an Indian IT firm based inMumbai, till couple of years back when Mastek used to hire fresh graduates for colleges they used toprovide them training on a particular language like Java, .NET, etc. and during the training they used toprovide compensation to the fresh graduates as well. But after losses is eight straight quarters Mastekstopped providing compensation during training to the fresh graduates and they were told that after thetraining if they do not have any projects then they would be asked to leave. By not giving compensationduring training and laying off the fresh graduates they made a profit of six crores in the last quarter. Butit is to be seen that whether in the long run they can sustain suitable growth by doing such practices. Slash and burn tactics do not always work and can lead to irreversible damage to the firm’sperformance. Remaining employees cannot compensate for the loss of productivity and at least 7% ofthe remaining employees quit in the six months following a layoff. Loosing valuable employees to layoffscan lead to loss of clients because the level of expected services may decrease, giving the competitors tocut deals to steal the business. In the study “HR as a source of Shareholder Value: Research and Recommendations”, it wasfound out that combining HR initiatives with strategies like performance management systems has a50% larger effect on firm’s performance than implementing single policies alone. In the research, Beckerand his colleagues focused on strategic impact of HRM system on both market-based and accountingbased measures of firm’s performance. Use of market-based measures of firm’s performance isappropriate in this line of research because they reflect the present value of the firm’s future cash flowswhich is net of any additional costs associated with implementing these systems. Thus organizationswhich fix their objective on share price, may achieve short term success but they are bound toencounter long term costs if their objectives are achieved at the expense of productivity and customers.Employee and customer needs frequently change, due to which an integrated workforce developmentstrategy helps the organization adapt to shifting goals. An HR strategy should translate business goals into individual accountability, thus creating longterm value for the organization. This is because engaged employees are able to drive customer loyalty aswell as corporate profits through their consistency and quality of service. Investing in employees’performance confirms to the shareholders that you are concerned with growth and not minimizingcosts, which provides a much smaller competitive advantage. Thus the number one priority for thevalue-creating HR function is to point to human capital problems that limit the ability of the firm toachieve important business priorities and can provide solutions to those problems.18 | P a g e HRM as a Source of Shareholder Value, Section -B
  • 19. HR Factors affecting ProfitsSome of the HR factors affecting profits are as follows. 1. Management participation 2. Open management style 3. Taking some risks, but not too many 4. Top managers spending 20% of the time with customers 5. Around 20% of top management should be outsiders 6. Management training is deemed important 7. Top managers should be effectively incentivized 8. Succession plan is done 9. A good appraisal plan is in place 10. Employees should get regular feedbackHR Factors affecting Market ValueSome of the HR factors affecting Market Value are as follows. 1. Use of knowledge and contract workers 2. Recruiting excellence 3. Good union-management relationship 4. Teamwork and 360 degrees feedback 5. Customer – focused environment 6. Remuneration 7. Sharing information with employees19 | P a g e HRM as a Source of Shareholder Value, Section -B

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