Most people work for small businesses or create their own new small businesses, and such businesses have special human resource management needs. The main purpose of this chapter is to help you apply what you know about human resource management to running a small business. The main topics we’ll address include:
the small business challenge,
using Internet and government tools to support the HR effort,
leveraging small size with familiarity, flexibility, fairness, and informality,
using professional employer organizations, and
managing HR systems, procedures, and paperwork.
After studying this chapter, you will be able to:
1. Explain why HRM is important to small businesses and how small business HRM is different from that in large businesses.
2. Give four examples of how entrepreneurs can use Internet and government tools to support the HR effort.
After studying this chapter, you will be able to:
3. List five ways entrepreneurs can use their small size to improve their HR processes.
4. Discuss how you would choose and deal with a professional employee organization.
5. Describe how you would create a start-up human resource system for a new small business.
About 99% of U.S. firms are small businesses, and about half the private-sector people working in the United States work for small firms. Small businesses as a group also account for most of the 600,000 or so new businesses created each year, as well as for most business growth (small firms grow faster than big ones). And small firms create most of the new jobs in the United States.
Managing human resources in small firms is different for four main reasons: size, priorities, informality, and the nature of the entrepreneur.
Size
The general guideline is that it’s not until a company reaches the 100-employee milestone that it can afford a human resource specialist. However, even five- to six-employee organizations must recruit, select, train, compensate, and retain qualified staff.
Priorities
It is not just size but the realities of the entrepreneur’s situation that drive them to focus their time on non-HR issues. Entrepreneurs must wear many hats and be able to change them quickly. Their focus is on helping the business achieve its growth and productivity goals leaving little time for personnel matters.
Informality
Human resources management activities tend to be more informal in smaller firms. Entrepreneurs must be able to react quickly to changes in competitive conditions.
The Entrepreneur
Entrepreneurs are people who create businesses under risky conditions, and starting new businesses from scratch is always risky. Entrepreneurs, therefore, need to be highly dedicated and visionary.
Implications
The differences listed above result in potential implications.
Owners may be at a competitive disadvantage due to having rudimentary HR practices.
There is no specialized HR expertise on board.
Workplace litigation may be around the next corner but the owners may not realize it.
Compensation regulations and laws may not be adequately addressed (if at all).
Duplication and paperwork leads to inefficiencies and data entry errors. For small businesses, employee data often appears on multiple HR management forms.
Entrepreneurs need all the advantages they can get, and for them, effective human resource management is a competitive necessity. Small firms with effective HR practices perform better than those with less effective practices. For many small firms, effective human resource management is also mandatory for getting and keeping big customers. For example, to comply with international ISO-9000 quality standards, many large customers check that their small vendors have and follow certain HR policies.
The Dealership
Auto dealer Carlos Ledezma’s strategy was to boost profits by building repeat business from customers who
like dealing with friendly, long-term employees. He knew his success therefore depended on building a
dedicated and customer-oriented staff, and getting them to stay. To achieve that, he follows a well thought
out customer-oriented human resource management strategy. He tests each job candidate to make sure the
job is the right fit. There’s a weeklong new-employee orientation that introduces them to their jobs and to
the firm’s mission and culture. Then each new employee gets a senior employee mentor for 90 days. He
or she teaches by example. For the first 90 days, mentors receive $50 to $100 for each vehicle their trainee
sells. In one recent year, Ledezma spent $150,000 on training.
Ledezma’s HR strategy pays off in profits that are well above average. Customers like dealing with his
dedicated long-term employees. His annual employee turnover is about 28%, and the average employee
stays about 8 years, both much better than the industry average.
Discussion Question 18-1: Write a short note on this topic: “What Carlos Ledezma is doing right
with respect to HR management, based on what I’ve read about HR in the other chapters of this book.”
So far, we have covered the advantages of size of a firm in that small businesses does not necessarily need HR expertise until it reaches the critical mass of about 100 employees. Nonetheless, the small firm still needs to recruit, hire, train, compensate, supervise, and train qualified employees. Such a firm also needs an awareness of basic issues of fairness in terms of compensation, equal opportunity employment, and other compliance issues.
We also noted that entrepreneurs are generally focused on running their business leaving little time for HR-related activities. However, size makes a difference in that small businesses can be more athletic in their business dealings as well as attending to their HR needs.
In general, we may observe that while small businesses can perform productively and move quickly on competitive issues, HR needs and requirements must receive attention.
No small business owner needs to cede the advantage to big competitors when it comes to human resource management. One can level the terrain by using Internet-based HR resources, including the free resources of the U.S. government. We’ll next look at how small firms can do this.
Small business owners spend much of their time tackling issues related to employment laws. These owners can quickly find the answers to many such questions online at federal agencies’ Web sites such as the following:
The U.S. Department of Labor’s First Step Employment Law Advisor (www.DOL.gov) helps small employers determine which laws apply to their business.
The U.S. Equal Employment Opportunity Commission (www.EEOC.gov) guides small employers on all laws pertaining to employment discrimination.
The DOL’s Occupational Safety and Health Administration site (www.OSHA.gov) supplies guidance for small business owners.
Internet resources can make small business owners almost as effective as their large competitors at writing job descriptions and building applicant pools. Small business owners can use the online recruiting tools to post positions or popular Internet job boards.
For the small business, one or two hiring mistakes could wreak havoc. Some tests are so easy to use they are particularly good for smaller firms. One example of such a test is the Predictive Index, which measures work-related personality traits, drives, and behaviors.
Although small companies can’t compete with the training resources of larger organizations, Internet training can provide, at a relatively low cost, the kinds of professional employee training that was formerly beyond most small employers’ reach.
Particularly when using tests at work, the employer must comply with equal employment laws. Many test providers will assist the employer in setting up a testing procedure. For example, as we noted, Wonderlic will review your job descriptions as part of its process.
Although small companies can’t compete with the training resources of larger organizations, Internet training can provide, at a relatively low cost, the kinds of professional employee training that was formerly beyond most small employers’ reach. There are hundreds (perhaps thousands) of private vendors that may be used. The federal government’s Small Business Administration provides a virtual campus that offers online courses, workshops, publications, and learning tools aimed toward supporting entrepreneurs. The National Association of Manufacturers (NAM) is the largest industrial organization in the United States. NAM’s Virtual University helps employees maintain and upgrade their work skills and continue their professional development.
Even small employers now have easy access to computerized and online appraisal and compensation services.
Without HR managers or safety departments, small businesses often don’t know where to turn for advice on promoting employee safety. OSHA provides free on-site safety and health services for small businesses.
Fortunately for busy entrepreneurs, organizations such as OSHA, NAM, and the SBA provide services and information that help guide emerging firms properly when it comes to laws and planning tools. Recruiting online is easier than ever and even small firms can compete effectively with larger ones.
Selection services and training programs can be provided by outside vendors that are easy to access via the Internet. Appraisal and compensation systems are also available as are tips and techniques to help the small business owner.
Finally, safety and health-related information for small businesses is available free from organizations such as OSHA.
Because small businesses need to capitalize on their strengths, they should capitalize on their smallness when dealing with employees. Smallness should translate into personal familiarity with each employee’s strengths, needs, and family situation. And it should translate into being flexible and informal in the human resource management policies and practices the company follows.
In general, small firms tend to rely on more informal employee selection and recruitment practices, such as employee referrals and unstructured interviews, than do large firms.
Just as small business managers can use Internet-based recruitment and selection tools, many low-tech tools are also available. We’ll look at two streamlined interviews, and work-sampling tests.
Work sampling tests require candidates to perform actual samples of the job in question. This also can be a very simple way to select employees.
A Streamlined Interviewing Process
Preparing for the Interview
One way to do so is to focus on four basic required factors—knowledge and experience, motivation, intellectual
capacity, and personality. To proceed this way, ask the following questions:
● Knowledge and experience. What must the candidate know to perform the job? What experience
is necessary to perform the job?
● Motivation. What should the person like doing to enjoy this job? Is there anything the person should
not dislike? Are there any essential goals or aspirations the person should have?
● Intellectual capacity. Are there any specific intellectual aptitudes required (mathematical, mechanical,
and so on)? How complex are the problems the person must solve? What must a person be able
to demonstrate intellectually?
● Personality factor. What are the critical personality qualities needed for success on the job (ability to
withstand boredom, decisiveness, stability, and so on)? How must the job incumbent handle stress,
pressure, and criticism? What kind of interpersonal behavior is required in the job?
Knowing How to Probe in the Interview
Next, ask a combination of situational questions plus open-ended questions to probe the candidate’s
Suitability for the job. For example:
● Knowledge and experience factor. Probe with situational questions such as “How would you organize
such a sales effort?” or “How would you design that kind of website?”
● Motivation factor. Probe such areas as the person’s likes and dislikes (for each thing done, what he
or she liked or disliked about it), aspirations (including the validity of each goal in terms of the person’s
reasoning about why he or she chose it), and energy level, perhaps by asking what he or she does on,
say, a “typical Tuesday.”
● Intellectual factor. Ask questions that judge such things as complexity of tasks the person has performed,
grades in school, test results (including scholastic aptitude tests, and so on), and how the
person organizes his or her thoughts and communicates.
● Personality factor. Probe by looking for self-defeating behaviors (aggressiveness, compulsive fidgeting,
and so on) and by exploring the person’s past interpersonal relationships. Ask questions about the
person’s past interactions (working in a group at school, working with fraternity brothers or sorority
sisters, leading the work team on the last job, and so on). Also, try to judge the person’s behavior in
the interview itself—Is the candidate personable? Shy? Outgoing?
Organizing the Interview
● Have a plan. Devise and use a plan to guide the interview. According to interviewing expert John
Drake, significant areas to touch on include the candidate’s:
● College experiences
● Work experience—summer, part-time
● Work experience—full-time (one by one)
● Goals and ambitions
● Reactions to the job you are interviewing for
● Self-assessments (by the candidate of his or her strengths and weaknesses)
● Military experiences
● Present outside activities
● Follow your plan. Start with an open-ended question for each topic, such as “Could you tell me
about what you did in college?” Then probe for information about the person’s knowledge and experience,
motivation, intelligence, and personality.
Match the Candidate to the Job
You should now be able to draw conclusions about the person’s knowledge and experience, motivation,
intellectual capacity, and personality, and to summarize the candidate’s strengths and limits. Next, compare
your conclusions to the job description and the list of requirements you developed when preparing for the
interview. This should provide a rational basis for matching the candidate to the job—one based on the
traits and aptitudes the job actually requires.
Discussion Question 18-2: List two situation questions (what would you do . . .?) and two behavioral
questions (what did you do . . .?) that you might ask to unearth insights into the candidate’s motivation.
One study in England found that smaller firms were much more informal in their approaches to training and development. Only about half had career development programs. Any management development training focused on learning specific firm-related competencies due to resource constraints. They also did not want to spend excessive time on employees who might then leave for another firm.
Covey’s suggestions include:
● Offer to cover the tuition for special classes
● Identify online training opportunities
● Provide a library of tapes and DVDs for systematic, disciplined learning during commute
times
● Encourage the sharing of best practices among associates
● When possible, send people to special seminars and association meetings for learning and
networking
● Create a learning ethic by having everyone teach each other what they are learning
The Family and Work Institute surveyed the benefits practices of about 1,000 small and large companies. They found that large firms offer more extensive benefit packages than do small ones. However, many small firms seemed to overcome their bigger competitors by offering more flexibility.
Because of the familiarity that comes from owners personally interacting with the employees each day, small businesses do a better job of fostering a culture of flexibility. Even without extensive resources, small firms can offer employees work-life benefits that larger employers cannot match or cannot match quickly. For example, workers can share job responsibilities
and work part-time from home. Here are other examples:
Extra time off. For example, Friday afternoons off in the summer.
● Compressed workweeks. For example, compressed summer workweeks.
● Bonuses at critical times. Small business owners are more likely to know what’s happening
in their employees’ lives. Use this knowledge to provide special bonuses, for instance,
if an employee has a new baby.
● Flexibility. For example, “If an employee is having a personal problem, help create a work schedule
that allows the person to solve problems without feeling like they’re going to be in trouble.”
Sensitivity to employees’ strengths and weaknesses. The small business owner should
stay attuned to his or her employees’ strengths, weaknesses, and aspirations. For example,
give them an opportunity to train for and move into the jobs they desire.
● Help them better themselves. For example, pay employees to take a class to help them
develop their job skills.
● Feed them. Provide free meals occasionally, perhaps by taking your employees to lunch.
● Make them feel like owners. For example, give employees input into major decisions, let
them work directly with clients, get them client feedback, share company performance data
with them, and let them share in the company’s financial success.
● Make sure they have what they need to do their jobs. Having motivated employees
is only half the challenge. Also ensure they have the necessary training, procedures,
computers, and so on.
● Constantly recognize a job well done. Capitalize on your day-to-day interactions with
employees to “never miss an opportunity to give your employees the recognition they
deserve.” Studies demonstrate that recognition can often be as powerful as financial reward.
The relatively personal nature of small business interactions makes it both easier and more
important to recognize employees.
Small businesses suffered greatly from the recession. The cost of benefits jumped significantly, and small businesses have had to get creative to meet employees’ needs while still remaining cost effective.
There are several ways that small firms can provide retirement plans for their employees. The Pension Protection Act of 2006 contains a provision for a new type of retirement benefit that combines traditional defined benefits and 401(k) plans.
Most small businesses are family businesses, in that the owner and one or more managers are family members. Being a non-family employee here isn’t always easy. They sometimes feel like outsiders. Some best practices include avoiding partiality in setting ground rules, treating people fairly, and erasing “family” privilege.
So far, we have discussed how to take advantage of the smaller sizes of entrepreneurial ventures while helping to mitigate the resources larger businesses have with respect to HR. Using more informal methods of hiring such as networking can be easy especially if the owner has a clear understanding of the job and personality requirement he or she is seeking. Streamlining interviews with a simple plan, using samples of actual work to be performed and a interview process or even informal training programs will move things along.
A plus for small businesses is the ability to provide flexibility in benefits and rewards in alignment with employee needs.
Finally, being fair with non-family members who are working alongside of your family is important. Equity and fairness as perceived by your employees is crucial to long-term success.
Outside vendors that are used to outsource all or most human resource functions are generally called professional employer organizations, human resources outsourcers, or sometimes staff leasing firms. These vendors range from payroll companies to those that handle all of an employer’s human resource management requirements. Let’s discuss.
Vendors go by the names professional employer organizations (PEOs), human resource outsourcers (HROs), or sometimes employee or staff leasing firms.
Employers turn to PEO’s for several reasons. By transferring the client firm’s employees to the PEO’s payroll, PEOs become co-employers of record for the employer’s employees. Small employers are likely to be faced with lack of specialized HR support or extensive paperwork. The Small Business Administration (SBA) estimates that small business owners spend up to 25% of their time on personnel-related paperwork.
In addition, staying in compliance with pension plan rules, Title VII, OSHA, COBRA, the Fair Labor Standards Act, and other personnel-related laws can be very time-consuming and mistakes may be made. Insurance and benefits are often an appealing reason to use PEOs. Obtaining and administering health and other insurance is more challenging for smaller firms than larger ones.
The professionalism that the PEO brings to recruiting, screening, training, compensating, and maintaining employee safety and welfare will hopefully translate into improved employee and business results.
There are several potential downsides to these firms. If your PEO is poorly managed or goes bankrupt, you could find yourself with an office full of uninsured workers. Several things may signal problems with the prospective PEO. One is lax due diligence.
Employers should choose and manage the PEO relationship carefully. Guidelines for doing so include:
• Conduct a needs analysis. Know ahead of time exactly what human resource concerns your
company wants to address.
• Review the services of all PEO firms you’re considering. Determine which can meet all your
requirements.
• Determine if the PEO is accredited. There is no rating system. However, the Employer Services
Assurance Corporation of Little Rock, Arkansas (www.Escorp.org), imposes higher financial,
auditing, and operating standards on its members. Also check the National Association of
Professional Employer Organizations (www.NAPEO.org), and www.PEO.com.
• Check the provider’s bank, credit, insurance, and professional references.
• Understand how the employee benefits will be funded. Is it fully insured or partially self-funded?
Who is the carrier? Confirm that employers will receive first-day coverage.
• See if the contract assumes the compliance liabilities in the applicable states.
• Review the service agreement carefully. Are the respective parties’ responsibilities and liabilities
clear?
• Investigate how long the PEO has been in business.
• Check out the prospective PEO’s staff. Do they seem to have the expertise to deliver on its
promises?
• Ask, how will the firm deliver its services? In person? By phone? Via the Web?
• Ask about upfront fees and how these are determined.
• Periodically get proof that payroll taxes and insurance premiums are being paid properly and that
any legal issues are handled correctly.
PEOs can be an invaluable resource for small and entrepreneurial firms. The firm and the PEO have co-responsibilities for the employers and both should conduct due diligence with the other. The small business should validate the professionalism of the PEO, the length of time in business, other firms who use them and even their financial viability. The PEO should carefully question the small business regarding their HR policies, practices, and even their philosophy of management. The business arrangement, however, can be very synergistic for both. The small business is relieved of not having specialized HR knowledge, certain liabilities, paperwork, and performance. The PEO continues to grow and effective manage employees using the knowledge and skills it has to produce results.
With just one or two employees you could keep track of everything in your head, or just write a separate memo for each HR action, and place it in a folder for each worker. But with more employees, you’ll need to create a human resource system comprised of standardized forms. Let’s talk about what that will take.
Very small employers (say, with 10 employees or less) will probably start with a manual human resource management system. This generally means obtaining and organizing a set of standardized personnel forms for recruitment, selection, training, appraisal, compensation, safety, and many more. You also will need some means for organizing all this information for each of your employees. This list barely scratches the surface of what is required for the most elemental manual HR system.
Several direct-mail catalog companies offer a variety of HR Materials. Firms such as HRdirect or G. Neil Company can provide a comprehensive source of all needed HR forms. A basic packet of 10 copies of most forms needed can also be purchased from Staples or other office supply stores.
As the small business grows, it becomes increasingly unwieldy and time consuming to continue using a manual system. Computerizing individual human resource management tasks is a better alternative. There are a variety of packaged resources available. At the Web site of the International Association for Human Resource Information Management, a categorical list of HR software vendors can be found.
We can define an integrated human resource information system (HRIS) as interrelated components working together
to collect, process, store, and disseminate information to support decision making, coordination, control, analysis, and visualization of an organization’s human resource management activities.
The term information system refers to the interrelated people, data, technology, and organizational procedures a company uses to collect, process, store, and disseminate information. A computerized Human Resource Information Systems (HRIS) will make the job easier.
The day-to-day minutiae of maintaining and updating employee records take an enormous amount of time. HRIS packages substitute powerful computerized processing for a wide range of the firm’s HR transactions.
HR information systems also make it possible (or easier) to make the company’s employees part of the HRIS. For example, employees self-enroll in all their desired benefits programs over the Internet at a secure site.
Because the HRIS integrates numerous individual HR tasks installing an HRIS boosts HR’s reporting capabilities. Because the HRIS’s software components are integrated, they enable the employer to reengineer and integrate its HR function.
Many firms today offer HRIS packages. The Web site for the International Association for Human Resource Information Management is a good starting place for vendors.
Employers increasingly use intranet-based HR information systems for benefits communication. Employees can access the benefits homepage and review the company’s 401(k) plan investment options. They can get answers to frequently asked questions about the company’s medical and dental plans, and report changes in family status.
We have reviewed the need to have at least a manual HR system in place that is organized and contributes to overall efficiencies. As a business grows, it becomes more complex and complexity can lead to mistakes. Automating a manual system is the next step and can be accomplished by using various software packages to remove some of the burden of manual record keeping.
The next step up the ladder is to consider using a Human Resource Information System. Many vendors provide systems that will work for your business. Some of the important considerations is whether the system is on or off-site, can it work with your existing hardware and can it grow with your business. An HRIS will speed your online HR transactions and can allow individuals to access parts of the system to check their benefits, for example.
The New HRIS
Questions
18-21. Using any benchmark data that you can find, including information from this textbook, what are some benchmark metrics that Lisa could be using to assess the efficiency of her human resource management operations? To what extent does the Hotel Paris’s quality service orientation enter into how Lisa’s metrics should compare?
18-22. Throughout this textbook, we’ve discussed various specific examples of how human resource management departments have been reducing the cost of delivering their services. Keeping in mind the Hotel Paris’s service quality orientation, please list and explain with examples how Lisa Cruz could use at least five of these.
18-23. Focusing only on human resource information systems for a moment, what sorts of systems would you suggest Lisa consider recommending for the Hotel Paris? Why?
18-24. Explain with detailed examples how Lisa can use free online and governmental sources to accomplish at least part of what you propose in your previous answers.
18-25. Give three examples of fee-based online tools you suggest Lisa use.
18-26. Do you suggest Lisa use a PEO? Why?
