A Handbook of Human Resource Management Practice ( PDFDrive ).pdf

Michael Armstrong
th edition
10
HUMAN
RESOURCE
MANAGEMENT
PRACTICE
A Handbook of

HUMAN
RESOURCE
MANAGEMENT
PRACTICE
A Handbook of

London and Philadelphia
Michael Armstrong
HUMAN
RESOURCE
MANAGEMENT
PRACTICE
A Handbook of
10TH EDITION

First published by Kogan Page Limited as A Handbook of Personnel Management Practice in 1977
Second edition 1984
Third edition 1988
Fourth edition 1991
Fifth edition 1995
Sixth edition 1996
Seventh edition published by Kogan Page Limited as A Handbook of Human Resource Management Practice
in 1999
Eighth edition 2001
Ninth edition 2003
Tenth edition 2006
Apart from any fair dealing for the purposes of research or private study, or criticism or review, as
permitted under the Copyright, Designs and Patents Act 1988, this publication may only be reproduced,
stored or transmitted, in any form or by any means, with the prior permission in writing of the
publishers, or in the case of reprographic reproduction in accordance with the terms and licences issued
by the CLA. Enquiries concerning reproduction outside these terms should be sent to the publishers at
the undermentioned addresses:
120 Pentonville Road 525 South 4th Street, #241
London N1 9JN Philadelphia, PA 19147
United Kingdom USA
www.kogan-page.co.uk
© Michael Armstrong, 1977, 1984, 1988, 1991, 1995, 1996, 1999, 2001, 2003, 2006
The right of Michael Armstrong to be identified as the author of this work has been asserted by him in
accordance with the Copyright, Designs and Patents Act 1988.
British Library Cataloguing in Publication Data
A CIP record for this book is available from the British Library.
ISBN 0 7494 4631 5
Library of Congress Cataloging-in-Publication Data
Armstrong, Michael, 1928-
A handbook of human resource management practice/Michael Armstrong.–10th ed.
p.cm.
Includes bibliographical references and index.
ISBN 0-7494-4631-5
1. Personnel management–Handbooks, manuals, etc. I. Title.
HF5549.17.A76 2006
658.3–dc22
2005032487
Typeset by Jean Cussons Typesetting, Diss, Norfolk
Printed and bound in Great Britain by Cambridge University Press

Contents
List of figures xvii
List of tables xxi
About the author xxiii
Preface xxv
PART I MANAGING PEOPLE
1 Human resource management 3
Human resource management defined 3; Human resource system 4;
Models of HRM 5; Aims of HRM 8; Policy goals of HRM 10;
Characteristics of HRM 11; Reservations about HRM 15; HRM and
personnel management 18; How HR impacts on organizational
performance 20; HRM in context 24
2 Human capital management 29
Human capital management defined 29; Human capital management
and human resource management 30; The concept of human capital 33;
Human capital management: practice and strategy 36; Human capital
measurement 37; Human capital reporting 47

3 Role of the HR function 53
The overall role of the HR function 54; The role of HR in facilitating and
managing change 54; Variations in the practice of HR 56; Organizing the
HR function 57; Marketing the HR function 59; Preparing, justifying and
protecting the HR budget 60; Outsourcing HR work 61; Shared HR
services 63; Using management consultants 64; Evaluating the HR
function 66
4 The role of the HR practitioner 71
The basic roles 71; Models of the practitioners of HR 76; Gaining support
and commitment 81; Ethical considerations 84; Professionalism in HRM
85; Ambiguities in the role of HR practitioners 87; Conflict in the HR
contribution 88; The competencies required by HR professionals 89
5 Role of the front-line manager 93
The basic role 93; The line manager and people management 94; The
respective roles of HR and line management 95; The line manager’s role
in implementing HR policies 97; How to improve front-line managers as
people managers 98
6 International HRM 99
International HRM defined 99; Issues in international HRM 99;
International organizational models 100; Convergence and
divergence 101; Cultural diversity 102; Think globally and act
locally 104; International HR policies 104; Managing expatriates 104
PART II HUMAN RESOURCE MANAGEMENT PROCESSES
7 Strategic HRM 113
The concept of strategy 113; Strategic HRM defined 115; Aims of
strategic HRM 116; Approaches to strategic HRM 117; Implementing
strategic HRM 121
8 HR strategies 123
HR strategies defined 123; Purpose 124; The distinction between
strategic HRM and HR strategies 124; Types of HR strategies 124;
Criteria for an effective HR strategy 129
vi ❚ Contents

9 Developing and implementing HR strategies 131
Propositions about the development process 132; Levels of strategic
decision-making 132; Strategic options and choices 133; Approaches
to HR strategy development 134; Methodology for strategy
development 140; Conducting a strategic review 141; Setting out the
strategy 143; Implementing HR strategies 143
10 HRM policies 147
What human resource policies are 147; Why have HR policies 147; Do
policies need to be formalized? 148; HR policy areas 148; Formulating
HR policies 156; Implementing HR policies 157
11 Competency-based HRM 159
Types of competencies 160; Competency frameworks 161; Reasons for
using competencies 163; Coverage of competencies 164; Use of
competencies 165; Developing a competency framework 167; Defining
technical competencies 169; Keys to success in using competencies 169;
Emotional intelligence 170
12 Knowledge management 173
Knowledge management defined 174; The concept of knowledge 175;
The purpose and significance of knowledge management 176;
Approaches to knowledge management 176; Knowledge management
systems 178; Knowledge management issues 178; The contribution of
HR to knowledge management 180
13 Analysing roles, competencies and skills 181
Role analysis 187; Competency analysis 193; Skills analysis 198
PART III WORK AND EMPLOYMENT
14 The nature of work 205
What is work? 205; Theories about work 206; Organizational factors
affecting work 208; Changing patterns of work 210; Unemployment 212;
Attitudes to work 212; Job-related well-being 212
Contents ❚ vii

15 The employment relationship 215
The employment relationship defined 215; Nature of the employment
relationship 215; Basis of the employment relationship 217; Defining the
employment relationship 217; Significance of the employment
relationship concept 218; Changes in the employment relationship 218;
Managing the employment relationship 218; Trust and the employment
relationship 220
16 The psychological contract 225
The psychological contract defined 225; The significance of the
psychological contract 227; The nature of the psychological contract 228;
How psychological contracts develop 229; The changing nature of the
psychological contract 231; The state of the psychological contract 233;
Developing and maintaining a positive psychological contract 234; The
state of the psychological contract 2004 235
PART IV ORGANIZATIONAL BEHAVIOUR
17 Characteristics of people 239
Individual differences 239; Attitudes 244; Influences on behaviour
at work 244; Attribution theory – how we make judgements about
people 245; Orientation to work 246; Roles 247; Implications for HR
specialists 248
18 Motivation 251
The process of motivation 252; Types of motivation 253; Motivation
theory 254; Instrumentality theory 254; Content (needs) theory 255;
Process theory 258; Herzberg’s two-factor model 262; The relationship
between motivation, job satisfaction and money 263; Job satisfaction 264;
Motivation and money 267; Motivation strategies 268
19 Organizational commitment and engagement 271
The concepts of commitment and engagement 271; Organizational
commitment 273; Influences on commitment and employee
satisfaction 279; Engagement 281
viii ❚ Contents

20 How organizations function 283
Basic considerations 283; Organization theories 283; Organization
structure 288; Types of organization 289; Organizational processes 292
21 Organizational culture 303
Definitions 303; The significance of culture 305; How organizational
culture develops 306; The diversity of culture 306; The components of
culture 307; Classifying organizational culture 309; Assessing
organizational culture 311; Measuring organizational climate 312;
Appropriate cultures 313; Supporting and changing cultures 314
PART V ORGANIZATION, DESIGN AND DEVELOPMENT
22 Organization design 319
The process of organizing 319; Aim 320; Conducting organization
reviews 321; Organization analysis 321; Organization diagnosis 322;
Organization planning 324; Responsibility for organization design 325
23 Job design and role development 327
Jobs and roles 327; Factors affecting job design 328; Job design 330; Job
enrichment 332; Self-managing teams 333; High-performance work
design 334; Role development 334
24 Organizational development, change and transformation 337
What is organizational development? 337; Organization
development 338; Change management 343; Organizational
transformation 352; Development and change processes 355
PART VI PEOPLE RESOURCING
People resourcing defined 359; People resourcing and HRM 359;
Plan 361
25 Human resource planning 363
The role of human resource planning 363; Aims of human resource
planning 368; The process of human resource planning 368; Resourcing
strategy 371; Scenario planning 372; Estimating future human resource
requirements 373; Labour turnover 375; Action planning 382; The
contribution of HR to human resource planning 388
Contents ❚ ix

26 Talent management 389
Talent management defined 390; The elements of talent
management 390; Creating a great place to work 394; Attraction
strategies 395; Retention strategies 397; Career management 399;
Talent management for knowledge workers 407; Talent management
in practice 407
27 Recruitment and selection 409
The recruitment and selection process 409; Defining requirements 409;
Attracting candidates 414; Advertising 416; E-recruitment 420;
Outsourcing recruitment 423; Educational and training
establishments 424; Application forms 425; Sifting applications 425;
Selection methods 429; Types of interviews 430; Assessment centres 430;
Graphology 431; Choice of selection methods 432; Improving the
effectiveness of recruitment and selection 432; References,
qualifications and offers 434; Final stages 436
28 Selection interviewing 439
Purpose 439; Advantages and disadvantages of interviews 440;
The nature of an interview 441; Interviewing arrangements 442;
Preparation 443; Timing 444; Planning and structuring interviews 444;
Interviewing approaches 445; Interview techniques – starting and
finishing 450; Interviewing techniques – asking questions 450; Selection
interviewing skills 457; Coming to a conclusion 458; Dos and don’ts of
selection interviewing 459
29 Selection tests 461
Psychological tests: definition 461; Purpose of psychological tests 461;
Characteristics of a good test 462; Types of test 463; Interpreting test
results 467; Choosing tests 468; The use of tests in a selection
procedure 468
30 Introduction to the organization 471
Induction defined 471; Why taking care about induction is important 472;
Reception 473; Documentation 474; Company induction – initial
briefing 475; Introduction to the workplace 475; Formal induction
courses 476; On-the-job induction training 477
x ❚ Contents

31 Release from the organization 479
General considerations 479; Redundancy 482; Outplacement 485;
Dismissal 487; Voluntary leavers 490; Retirement 490
PART VII PERFORMANCE MANAGEMENT
32 The basis of performance management 495
Performance management defined 495; Aims of performance
management 496; Characteristics of performance management 496;
Understanding performance management 497; Guiding principles of
performance management 499; Performance appraisal and performance
management 500; Views on performance management 500
33 The process of performance management 503
Performance management as a process 503; Performance management as
a cycle 503; Performance agreements 504; Managing performance
throughout the year 508; Reviewing performance 509; Rating
performance 512; Dealing with under-performers 515; Introducing
performance management 517
34 360-degree feedback 521
360-degree feedback defined 521; Use of 360-degree feedback 522;
Rationale for 360-degree feedback 523; 360-degree feedback –
methodology 524; Development and implementation 526; 360-degree
feedback – advantages and disadvantages 527; 360-degree feedback –
criteria for success 528
PART VIII HUMAN RESOURCE DEVELOPMENT
35 Strategic human resource development 533
Strategic HRD defined 533; Strategic HRD aims 534; Components of
HRD 534; HRD and HRM 535; The process of learning and
development 535; Strategies for HRD 536; Human resource development
philosophy 537
36 Organizational learning and the learning organization 539
Organizational learning 540; The learning organization 543
Contents ❚ xi

37 How people learn 549
Learning defined 549; The learning process 550; Learning theory 550;
Learning styles 552; Learning to learn 554; The learning curve 554; The
motivation to learn 555; The implications of learning theory and
concepts 556
38 Learning and development 559
Learning 559; Development 570; Training 575
39 E-learning 583
What is e-learning? 583; Aim of e-learning 584; The technology of
e-learning 584; The e-learning process 585; The business case for
e-learning 586; Developing e-learning processes 588
40 Management development 591
Aims of management development 592; Management development:
needs and priorities 592; The requirements, nature and elements of
management development 593; Management development activities 594;
Approaches to management development 596; Emotional intelligence
and leadership qualities 602; Responsibility for management
development 603
41 Formulating and implementing learning and development strategies 607
Making the business case 607; Developing a learning culture 609;
Identifying learning needs 610; Planning and implementing learning and
development programmes 612; Evaluation of learning 615
PART IX REWARDING PEOPLE
42 Reward management 623
Reward management defined 623; The aims of reward management 624;
The philosophy of reward management 624; The elements of reward
management 625; Total reward 629; Reward management for directors
and executives 634; Reward management for sales staff 636; Paying
manual workers 636
xii ❚ Contents

43 Strategic reward 643
Reward strategy defined 643; Why have a reward strategy? 644; The
structure of reward strategy 644; The content of reward strategy 645;
Guiding principles 649; Developing reward strategy 649; Components of
an effective reward strategy 651; Reward strategy priorities 652;
Examples of reward strategies 653; Implementing reward strategy 656;
Reward strategy and line management capability 657
44 Job evaluation 659
Job evaluation defined 660; Analytical job evaluation 660; Non-analytical
job evaluation 664; The incidence of job evaluation 666; Computer-
assisted job evaluation 667; Criteria for choice 668; The case for and
against job evaluation 671; Designing a point-factor job evaluation
scheme 672; Conclusions 679
45 Market rate analysis 681
Purpose 681; The concept of the market rate 681; The information
required 682; Job matching 682; Presentation of data 683; Sources of
information 683
46 Grade and pay structures 689
Grade structure defined 689; Pay structure defined 690; Guiding
principles for grade and pay structures 690; Types of grade and pay
structure 691; Designing grade and pay structures 698
47 Contingent pay 707
Contingent pay defined 708; The incidence of contingent pay 708; The
nature of individual contingent pay 709; Individual contingent pay as a
motivator 709; Arguments for and against individual contingent pay 710;
Alternatives to individual contingent pay 712; Criteria for success 713;
Performance-related pay 713; Competence-related pay 714;
Contribution-related pay 716; Skill-based pay 718; Service-related
pay 720; Choice of approach 721; Readiness for individual contingent
pay 721; Developing and implementing individual contingent pay 724;
Team-based pay 724; Organization-wide schemes 725
Contents ❚ xiii

48 Employee benefits, pensions and allowances 729
Employee benefits 729; Occupational pension schemes 731; Allowances
and other payments to employees 734
49 Managing reward systems 737
Reward budgets and forecasts 737; Evaluating the reward system 739;
Conducting pay reviews 740; Control 744; Reward procedures 745;
Responsibility for reward 746; Communicating to employees 748
PART X EMPLOYEE RELATIONS
Employee relations defined 751; Plan 752
50 The framework of employee relations 753
The elements of employee relations 754; Industrial relations as
a system of rules 754; Types of regulations and rules 755; Collective
bargaining 756; The unitary and pluralist views 758; The reconciliation of
interests 759; Individualism and collectivism 759; Voluntarism and its
decline 759; The HRM approach to employee relations 761; The context
of industrial relations 762; Developments in industrial relations 763; The
parties to industrial relations 766; Role of the HR function in employee
relations 771
51 Employee relations processes 773
Employee relations policies 774; Employee relations strategies 778;
Employee relations climate 779; Union recognition and
de-recognition 781; Collective bargaining arrangements 783; Informal
employee relations processes 788; Other features of the industrial
relations scene 789; Managing with trade unions 791; Managing
without trade unions 792
52 Negotiating and bargaining 795
The nature of negotiating and bargaining 795; Negotiating 796;
Negotiating and bargaining skills 803
xiv ❚ Contents

53 Employee voice 807
The concept of employee voice 807; Involvement and participation 808;
Purposes of employee voice 808; The framework for employee voice 808;
Expression of employee voice 809; Factors affecting choice 810; Forms of
employee voice 810; Joint consultation 811; Attitude surveys 812;
Suggestion schemes 814; Planning for voice 815
54 Communications 817
Communication areas and objectives 819; Communications strategy 819;
Communication systems 821
PART XI HEALTH, SAFETY AND WELFARE
55 Health and safety 829
Managing health and safety at work 830; The importance of health
and safety in the workplace 830; Benefits of workplace health
and safety 831; Health and safety policies 832; Conducting risk
assessments 833; Health and safety audits 836; Safety inspections 838;
Occupational health programmes 838; Managing stress 839; Accident
prevention 841; Measuring health and safety performance 841;
Communicating the need for better health and safety practices 842;
Health and safety training 843; Organizing health and safety 843
56 Welfare services 845
Why provide welfare services? 845; What sort of welfare services? 847;
Individual services 848; Group welfare services 851; Provision of
employee welfare services 851; Internal counselling services 852;
Employee assistance programmes 852
PART XII EMPLOYMENT AND HRM SERVICES
57 Employment practices 857
Terms and conditions and contracts of employment 858; Mobility
clauses 860; Transfer practices 860; Promotion practices 861; Flexible
working 862; Attendance management 863; Equal opportunity 866;
Ethnic monitoring 867; Managing diversity 868; The Data
Protection Act 869; Sexual harassment 870; Smoking 872; Substance
abuse at work 873; Bullying 873; AIDS 874; E-mails 874; Work-life
balance 875
Contents ❚ xv

58 HRM procedures 879
Grievance procedure 880; Disciplinary procedure 881; Capability
procedure 883; Redundancy procedure 885
59 Computerized human resource information systems 889
Benefits of a computerized human resource information system 890;
HR information strategy 890; The functions of a computerized HR
system 891; The technical infrastructure 892; Rating of system
features 892; An effective system 893; Problems and how to deal with
them 894; Developing a computerized HR information system 895;
Applications 899; Auditing the system 906
Appendix: Example of an attitude survey 907
References 911
Subject index 953
Author index 977
xvi ❚ Contents

List of figures
0.1 Route map xxvi
0.2 Relationship between aspects of people management 2
1.1 HRM activities 5
1.2 The Human Resource Cycle 6
1.3 The Harvard Framework for Human Resource Management 7
1.4 Model of the link between HRM and performance 23
2.1 The Sears Roebuck Model: Employee-Customer-Profit chain 41
2.2 The balanced scorecard 43
2.3 The EFQM model 44
2.4 Human capital external reporting framework 49
2.5 Human capital reporting dashboard for area managers: Nationwide 51
4.1 Types of personnel management 78
4.2 The changing role of the HR practitioner 79
9.1 Strategic review sequence 142
13.1 Example of a role profile 192
15.1 Dimensions of the employment relationship 216
16.1 A model of the psychological contract 230
18.1 The process of motivation 253
18.2 Motivation model 260
20.1 Channels of communication within groups 294
25.1 The process of human resource planning 370

25.2 A survival curve 378
26.1 The elements of talent management 391
26.2 Career progression curves 401
26.3 The process of career management 401
26.4 Management succession schedule 404
26.5 Competence band career progression system 405
26.6 Career paths in a career family structure 406
26.7 Talent acquisition and development at Centrica 408
27.1 Person specification for an HR officer 412
27.2 Example of an application form (compressed) 426
27.3 Accuracy of some methods of selection 433
28.1 Part of a critical-incident interview for sales people 448
28.2 Behavioural-based interview set 449
29.1 A normal curve 467
33.1 The performance management cycle 504
34.1 360-degree feedback model 522
34.2 360-degree feedback profile 525
35.1 Components of human resource development 534
36.1 Single- and double-loop learning 541
36.2 Managing learning to add value; the learning cycle 542
37.1 The Kolb learning cycle 552
37.2 A standard learning curve 555
37.3 Different rates of learning 555
37.4 A stepped learning curve 556
38.1 Stages in preparing and implementing a personal development plan 572
38.2 Impact of development 575
38.3 Systematic training model 577
39.1 A blended learning programme 587
41.1 Learning needs analysis – areas and methods 611
41.2 A learning specification 613
42.1 Reward management: elements and interrelationships 630
42.2 The components of total reward 631
42.3 Model of total reward 633
43.1 A reward gap analysis 646
43.2 Reward philosophy and guiding principles at B&Q 650
43.3 A model of the reward strategy development process 651
43.4 Reward strategy priorities 652
43.5 The Norwich Union Insurance Progression, Performance & Pay 654
framework
xviii ❚ List of figures

43.6 Integrated reward model – Kwik-fit 655
44.1 A paired comparison 665
44.2 A typical job evaluation programme 675
44.3 Design sequence 676
46.1 A narrow, multi-graded structure 692
46.2 A broad-graded structure 693
46.3 Narrow and broad-banded structures 694
46.4 A broad-banded structure with zones 694
46.5 A job family structure 694
46.6 A career family structure 696
46.7 A pay spine 697
46.8 Type of grade and pay structure 701
46.9 Flow chart: design of a new grade and pay structure 705
47.1 Incidence of contingent pay schemes 708
47.2 Line of sight model 713
47.3 Performance-related pay 713
47.4 Competence-related pay 714
47.5 Contribution pay model (1) 716
47.6 Contribution pay model (2) 716
47.7 Contribution-related pay 717
47.8 Contribution-related pay model (Shaw Trust) 718
50.1 Employee relations: reconciliation of interests 760
52.1 Negotiating range within a settlement range 799
52.2 Negotiating range with a negotiating gap 800
52.3 Stages of a negotiation 801
53.1 A framework for employee voice 809
List of figures ❚ xix

List of tables
1.1 Similarities and differences between HRM and personnel management 19
1.2 Outcomes of research on the link between HR and organizational
performance 21
4.1 Competency framework for HR professionals 90
4.2 Key competency areas 91
9.1 Linking HR and competitive strategies 136
9.2 HRM best practices 137
11.1 Incidence of different competency headings 162
14.1 Feelings at work 213
16.1 Job satisfaction 235
18.1 Summary of motivation theories 256
18.2 Motivation strategies 269
19.1 The Hay Group model of engaged performance 282
25.1 Survival rate analysis 378
25.2 Leavers by length of service 380
32.1 Performance appraisal compared with performance management 501
37.1 The implications of learning theory and concepts 557
38.1 Characteristics of formal and informal learning 565
41.1 Use of learning activities 615
41.2 Use of evaluation tools 619

42.1 Economic theories explaining pay levels 626
42.2 Summary of payment and incentive arrangements for sales staff 637
42.3 Comparison of shopfloor payment-by-result schemes 639
43.1 Examples of reward strategies and their derivation 656
44.1 Comparison of approaches to job evaluation 669
45.1 Summary of sources of market data 686
46.1 Summary analysis of different grade and pay structures 699
47.1 Comparison of individual contingent pay schemes 722
50.1 Contrasting dimensions of industrial relations and HRM 761
54.1 Communication areas and objectives 820
59.1 Computer system problems and solutions 894
xxii ❚ List of tables

About the author
Michael Armstrong is an honours graduate in economics from the London School of
Economics, a Companion of the Chartered Institute of Personnel and Development
and a Fellow of the Institute of Management Consultancy.
This book is largely based on Michael Armstrong’s hands-on experience as a
personnel practitioner, initially in the engineering industry, specializing in industrial
relations, and then in the engineering and food industries as an employee develop-
ment specialist.
For 12 years he was an executive director with responsibility for HR in a large
publishing firm and for three years of that period also acted as general manager for
an operating division. For a further 10 years he headed up the HR consultancy divi-
sion of Coopers & Lybrand. He is Managing Partner of e-reward.uk and also practises
as an independent consultant. This experience has been supplemented recently by a
number of research projects carried out on behalf of the Chartered Institute of
Personnel and Development. These covered the personnel function’s contribution to
the bottom line, strategic HRM, incentive pay, job evaluation, team rewards, broad-
banded pay structures, and performance management. He was Chief Examiner
Employee Reward for the CIPD from 1997–2001.
His publications for Kogan Page include Reward Management, Performance Manage-
ment, How to Be an Even Better Manager, A Handbook of Management Techniques and A
Handbook of Employee Reward, Management and Leadership.

Preface
This tenth edition of A Handbook of Human Resource Management Practice contains
many additions and revisions. It refers to major developments in HR practice in the
last two to three years such as the development of the theory and practice of human
capital management, talent management and approaches to learning and develop-
ment, all covered in new or substantially revised chapters. Reference is also made to a
number of significant research projects including those conducted by the CIPD, IES
and e-reward. Chapters on the following subjects have been either wholly replaced or
extensively revised in the light of new concepts of good practice, the experience of the
author as a practitioner and the outcomes of research:
● human resource management;
● role of the HR function;
● role of the HR practitioner;
● strategic human resource management;
● competency-based HRM;
● the delivery of learning and training;
● performance management;
● reward management fundamentals;
● grade and pay structures.
The plan of the handbook is illustrated in the ‘route map’ shown in Figure 0.1.

xxvi ❚ Preface
3 Role of HR function
4 Role of HR practitioner
5 Role of line manager
II HRM processes
7 Strategic HRM
8 HR strategies
9 Developing HR strategies
10 HRM policies
11 Competency-based HRM
12 Knowledge management
13 Analysing roles,
competencies and skills
V Organization
22 Organization
design
23 Job and role
design
24 Organization
development
VI People resourcing
25 Human resource
planning
26 Talent
management
27 Recruitment and
selection
28 Selection tests
29 Introduction to the
organization
30 Release from the
organization
VII Performance
management
32 Basis of
performance
management
33 Performance
management
processes
34 360-degree
feedback
VIII Human resource
development
35 Strategic HRD
36 Organizational
learning
37 How people learn
38 Learning and
development
39 E-learning
40 Management
development
41 Learning and
development
strategies
IX Rewarding
people
42 Reward
management
43 Strategic reward
44 Job evaluation
45 Market rate
analysis
46 Grade and pay
structures
47 Contingent pay
48 Employee benefits
49 Managing reward
systems
X Employee
relations
50 Framework of
employee relations
51 Employee relations
processes
52 Negotiating and
bargaining
53 Employee voice
54 Communications
XI Health, safety
and welfare
55 Health and safety
56 Welfare services
XII Employment and
HRM services
57 Employment
practices
58 HRM procedures
59 Computerised
HR information
systems
Factors affecting HRM strategy
policy and practice
III Work and employment
14 The nature of work
15 The employment relationship
16 The psychological contract
IV Organizational behaviour
17 Characteristics of people
18 Motivation
19 Commitment and engagement
20 How organizations function
21 Organizational culture
I People management
1 Human resource management
2 Human capital management
HRM strategy,
policy and
practice
6 International HRM
Figure 0.1 Route map

Managing people
This part underpins the rest of the Handbook. It deals with the approaches and philosophies
that affect how people are managed in organizations, the roles of the HR function and its
members, and the special considerations that affect international people management. The
term ‘people management’ embraces the two related concepts of human resource management
(HRM) and human capital management (HCM), which are defined and explained in the first
two chapters. These have virtually replaced the term ‘personnel management’, although the
philosophies and practices of personnel management still provide the foundations for the
philosophy and practices of HRM and HCM. The relationships between these aspects of people
management are modelled in Figure 0.2.
Part I

2 ❚ Managing people
People management
The policies and practices which govern
how people are managed and developed
in organizations.
Human resource management
‘A strategic and coherent approach to the
management of an organization’s most
valued assets – the people working there
who individually and collectively contribute
to the achievement of its objectives.’
Human capital management
‘An approach to obtaining, analysing and
reporting on data which informs the direc-
tion of value-adding people management
strategic investment and operational deci-
sions at corporate level and at the level of
front line management.’
Personnel management
‘Personnel management is concerned with
obtaining, organizing and motivating the
human resources required by the enter-
prise.’
(Armstrong, 1977)
Figure 0.2 Relationship between aspects of people management

Human resource management
The terms ‘human resource management’ (HRM) and ‘human resources’ (HR) have
largely replaced the term ‘personnel management’ as a description of the processes
involved in managing people in organizations. The concept of HRM underpins all the
activities described in this book, and the aim of this chapter is to provide a framework
for what follows by defining the concepts of HRM and an HR system, describing the
various models of HRM and discussing its aims and characteristics. The chapter
continues with a review of reservations about HRM and the relationship between
HRM and personnel management and concludes with a discussion of the impact
HRM can make on organizational performance.
HUMAN RESOURCE MANAGEMENT DEFINED
Human resource management is defined as a strategic and coherent approach to the
management of an organization’s most valued assets – the people working there who
individually and collectively contribute to the achievement of its objectives.
Storey (1989) believes that HRM can be regarded as a ‘set of interrelated policies
with an ideological and philosophical underpinning’. He suggests four aspects that
constitute the meaningful version of HRM:
1

1. a particular constellation of beliefs and assumptions;
2. a strategic thrust informing decisions about people management;
3. the central involvement of line managers; and
4. reliance upon a set of ‘levers’ to shape the employment relationship.
HUMAN RESOURCE SYSTEM
Human resource management operates through human resource systems that bring
together in a coherent way:
● HR philosophies describing the overarching values and guiding principles adopted
in managing people.
● HR strategies defining the direction in which HRM intends to go.
● HR policies, which are the guidelines defining how these values, principles and
the strategies should be applied and implemented in specific areas of HRM.
● HR processes consisting of the formal procedures and methods used to put HR
strategic plans and policies into effect.
● HR practices comprising the informal approaches used in managing people.
● HR programmes, which enable HR strategies, policies and practices to be imple-
mented according to plan.
Becker and Gerhart (1996) have classified these components into three levels: the
system architecture (guiding principles), policy alternatives and processes and prac-
tices.
See Figure 1.1.
MODELS OF HRM
The matching model of HRM
One of the first explicit statements of the HRM concept was made by the Michigan
School (Fombrun et al, 1984). They held that HR systems and the organization struc-
ture should be managed in a way that is congruent with organizational strategy
(hence the name ‘matching model’). They further explained that there is a human
resource cycle (an adaptation of which is illustrated in Figure 1.2), which consists of
four generic processes or functions that are performed in all organizations. These are:
1. selection – matching available human resources to jobs;

2. appraisal – performance management;
3. rewards – ‘the reward system is one of the most under-utilized and mishandled
managerial tools for driving organizational performance’; it must reward short
as well as long-term achievements, bearing in mind that ‘business must perform
in the present to succeed in the future’;
4. development – developing high quality employees.
Human resource management ❚ 5
Organization Resourcing
Human resource
planning
Recruitment and
selection
Talent
management
HR services
HR
development
Reward
management
Employee
relations
Design
Organizational
learning
Job evaluation/
Market surveys
Industrial
relations
Development
Individual
learning
Grade and pay
structures
Employee voice
Job/role
design
Management
development
Contingent pay Communications
Performance
management
Employee
benefits
Health/safety
and welfare
Knowledge
management
Human capital
management
HUMAN RESOURCE
MANAGEMENT
Figure 1.1 HRM activities

The Harvard framework
The other founding fathers of HRM were the Harvard School of Beer et al (1984) who
developed what Boxall (1992) calls the ‘Harvard framework’. This framework is
based on the belief that the problems of historical personnel management can only be
solved:
when general managers develop a viewpoint of how they wish to see employees
involved in and developed by the enterprise, and of what HRM policies and practices
may achieve those goals. Without either a central philosophy or a strategic vision –
which can be provided only by general managers – HRM is likely to remain a set of
independent activities, each guided by its own practice tradition.
Beer and his colleagues believed that ‘Today, many pressures are demanding a
broader, more comprehensive and more strategic perspective with regard to the orga-
nization’s human resources.’ These pressures have created a need for: ‘A longer-term
perspective in managing people and consideration of people as potential assets rather
than merely a variable cost.’ They were the first to underline the HRM tenet that it
belongs to line managers. They also stated that: ‘Human resource management
involves all management decisions and action that affect the nature of the relation-
ship between the organization and its employees – its human resources.’
Selection
Performance
management
Performance
Rewards
Development
Figure 1.2 The Human Resource Cycle (adapted from Fombrun et al, 1984)

The Harvard school suggested that HRM had two characteristic features: 1) line
managers accept more responsibility for ensuring the alignment of competitive
strategy and personnel policies; 2) personnel has the mission of setting policies that
govern how personnel activities are developed and implemented in ways that make
them more mutually reinforcing. The Harvard framework as modelled by Beer et al is
shown in Figure 1.3.
According to Boxall (1992) the advantages of this model are that it:
● incorporates recognition of a range of stakeholder interests;
● recognizes the importance of ‘trade-offs’, either explicitly or implicitly, between
the interests of owners and those of employees as well as between various interest
groups;
● widens the context of HRM to include ‘employee influence’, the organization of
work and the associated question of supervisory style;
Stakeholder
interests:
● shareholders
● management
● employees
● government
● unions
Situational
factors:
● work force
characteristics
● business
strategy and
conditions
● management
philosophy
● labour market
● unions
● task technology
● laws and social
values
HR outcomes:
● commitment
● congruence
● cost
effectiveness
Long-term
consequences
● individual well-
being
● organizational
effectiveness
● societal well-
being
HRM policy
choices:
● employee
influence
● human resource
flow
● reward systems
● work systems
Figure 1.3 The Harvard Framework for Human Resource Management (Source:
Beer et al, 1984)

● acknowledges a broad range of contextual influences on management’s choice of
strategy, suggesting a meshing of both product-market and socio-cultural logics;
● emphasizes strategic choice – it is not driven by situational or environmental
determinism.
The Harvard model has exerted considerable influence over the theory and practice
of HRM, particularly in its emphasis on the fact that HRM is the concern of manage-
ment in general rather than the personnel function in particular.
AIMS OF HRM
The overall purpose of human resource management is to ensure that the organiza-
tion is able to achieve success through people. As Ulrich and Lake (1990) remark:
‘HRM systems can be the source of organizational capabilities that allow firms to
learn and capitalize on new opportunities.’ Specifically, HRM is concerned with
achieving objectives in the areas summarized below.
Organizational effectiveness
‘Distinctive human resource practices shape the core competencies that determine
how firms compete’ (Cappelli and Crocker-Hefter, 1996). Extensive research has
shown that such practices can make a significant impact on firm performance. HRM
strategies aim to support programmes for improving organizational effectiveness by
developing policies in such areas as knowledge management, talent management
and generally creating ‘a great place to work’. This is the ‘big idea’ as described by
Purcell et al (2003), which consists of a ‘clear vision and a set of integrated values’.
More specifically, HR strategies can be concerned with the development of contin-
uous improvement and customer relations policies.
The human capital of an organization consists of the people who work there and on
whom the success of the business depends. Human capital has been defined by
Bontis et al (1999) as follows:
Human capital represents the human factor in the organization; the combined intelli-
gence, skills and expertise that give the organization its distinctive character. The human
elements of the organization are those that are capable of learning, changing, innovating
and providing the creative thrust which if properly motivated can ensure the long-term
survival of the organization.

Human capital can be regarded as the prime asset of an organization and businesses
need to invest in that asset to ensure their survival and growth. HRM aims to ensure
that the organization obtains and retains the skilled, committed and well-motivated
workforce it needs. This means taking steps to assess and satisfy future people needs
and to enhance and develop the inherent capacities of people – their contributions,
potential and employability – by providing learning and continuous development
opportunities. It involves the operation of ‘rigorous recruitment and selection proce-
dures, performance-contingent incentive compensation systems, and management
development and training activities linked to the needs of the business’ (Becker et al,
1997). It also means engaging in talent management – the process of acquiring and
nurturing talent, wherever it is and wherever it is needed, by using a number of inter-
dependent HRM policies and practices in the fields of resourcing, learning and devel-
opment, performance management and succession planning.
The process of human capital management (HCM) as described in the next
chapter is closely associated with human resource management. However, the
focus of HCM is more on the use of metrics (measurements of HR and people perfor-
mance) as a means of providing guidance on people management strategy and
practice.
Knowledge management
Knowledge management is ‘any process or practice of creating, acquiring, capturing,
sharing and using knowledge, wherever it resides, to enhance learning and perfor-
mance in organizations’ (Scarborough et al, 1999). HRM aims to support the develop-
ment of firm-specific knowledge and skills that are the result of organizational
learning processes.
Reward management
HRM aims to enhance motivation, job engagement and commitment by introducing
policies and processes that ensure that people are valued and rewarded for what they
do and achieve and for the levels of skill and competence they reach.
Employee relations
The aim is to create a climate in which productive and harmonious relationships can
be maintained through partnerships between management and employees and their
trade unions.

Meeting diverse needs
HRM aims to develop and implement policies that balance and adapt to the needs of
its stakeholders and provide for the management of a diverse workforce, taking into
account individual and group differences in employment, personal needs, work style
and aspirations and the provision of equal opportunities for all.
Bridging the gap between rhetoric and reality
The research conducted by Gratton et al (1999) found that there was generally a wide
gap between the sort of rhetoric expressed above and reality. Managements may start
with good intentions to do some or all of these things but the realization of them –
‘theory in use’ – is often very difficult. This arises because of contextual and process
problems: other business priorities, short-termism, limited support from line
managers, an inadequate infrastructure of supporting processes, lack of resources,
resistance to change and lack of trust. An overarching aim of HRM is to bridge this
gap by making every attempt to ensure that aspirations are translated into sustained
and effective action. To do this, members of the HR function have to remember that it
is relatively easy to come up with new and innovatory policies and practice. The
challenge is to get them to work. They must appreciate, in the phrase used by Purcell
et al (2003) that it is the front line managers who bring HR policies to life, and act
accordingly.
POLICY GOALS OF HRM
The models of HRM, the aims set out above and other definitions of HRM have been
distilled by Caldwell (2004) into 12 policy goals:
1. Managing people as assets that are fundamental to the competitive advantage of
the organization.
2. Aligning HRM policies with business policies and corporate strategy.
3. Developing a close fit of HR policies, procedures and systems with one another.
4. Creating a flatter and more flexible organization capable of responding more
quickly to change.
5. Encouraging team working and co-operation across internal organizational
boundaries.
6. Creating a strong customer-first philosophy throughout the organization.
7. Empowering employees to manage their own self-development and learning.

8. Developing reward strategies designed to support a performance-driven
culture.
9. Improving employee involvement through better internal communication.
10. Building greater employee commitment to the organization.
11. Increasing line management responsibility for HR policies.
12. Developing the facilitating role of managers as enablers.
CHARACTERISTICS OF HRM
The characteristics of the HRM concept as they emerged from the writings of the
pioneers and later commentators are that it is:
● diverse;
● strategic with an emphasis on integration;
● commitment-oriented;
● based on the belief that people should be treated as assets (human capital);
● unitarist rather than pluralist, individualistic rather than collective in its approach
to employee relations;
● a management-driven activity – the delivery of HRM is a line management
responsibility;
● focused on business values.
The diversity of HRM
But these characteristics of HRM are by no means universal. There are many models,
and practices within different organizations are diverse, often only corresponding to
the conceptual version of HRM in a few respects.
Hendry and Pettigrew (1990) play down the prescriptive element of the HRM
model and extend the analytical elements. As pointed out by Boxall (1992), such an
approach rightly avoids labelling HRM as a single form and advances more slowly
by proceeding more analytically. It is argued by Hendry and Pettigrew that ‘better
descriptions of structures and strategy-making in complex organizations, and of
frameworks for understanding them, are an essential underpinning for HRM’.
A distinction was made by Storey (1989) between the ‘hard’ and ‘soft’ versions of
HRM. The hard version of HRM emphasizes that people are important resources
through which organizations achieve competitive advantage. These resources have
therefore to be acquired, developed and deployed in ways that will benefit the orga-
nization. The focus is on the quantitative, calculative and business-strategic aspects of

managing human resources in as ‘rational’ a way as for any other economic factor. As
Guest (1999a) comments:
The drive to adopt HRM is... based on the business case of a need to respond to an
external threat from increasing competition. It is a philosophy that appeals to manage-
ments who are striving to increase competitive advantage and appreciate that to do this
they must invest in human resources as well as new technology.
He also commented that HRM ‘reflects a long-standing capitalist tradition in which
the worker is regarded as a commodity’. The emphasis is therefore on the interests of
management, integration with business strategy, obtaining added value from people
by the processes of human resource development and performance management and
the need for a strong corporate culture expressed in mission and value statements
and reinforced by communications, training and performance management
processes.
The soft version of HRM traces its roots to the human-relations school; it empha-
sizes communication, motivation and leadership. As described by Storey (1989) it
involves ‘treating employees as valued assets, a source of competitive advantage
through their commitment, adaptability and high quality (of skills, performance and
so on)’. It therefore views employees, in the words of Guest (1999a), as means rather
than objects, but it does not go as far as following Kant’s advice: ‘Treat people as ends
unto themselves rather than as means to an end.’ The soft approach to HRM stresses
the need to gain the commitment – the ‘hearts and minds’ – of employees through
involvement, communications and other methods of developing a high-commitment,
high-trust organization. Attention is also drawn to the key role of organizational
culture.
In 1998, Legge defined the ‘hard’ model of HRM as a process emphasizing ‘the
close integration of human resource policies with business strategy which regards
employees as a resource to be managed in the same rational way as any other
resource being exploited for maximum return’. In contrast, the soft version of HRM
sees employees as ‘valued assets and as a source of competitive advantage through
their commitment, adaptability and high level of skills and performance’.
It has, however, been observed by Truss (1999) that ‘even if the rhetoric of HRM is
soft, the reality is often hard, with the interests of the organization prevailing over
those of the individual’. And research carried out by Gratton et al (1999) found that in
the eight organizations they studied, a mixture of hard and soft HRM approaches was
identified. This suggested to the researchers that the distinction between hard and
soft HRM was not as precise as some commentators have implied.

The strategic nature of HRM
Perhaps the most significant feature of HRM is the importance attached to strategic
integration, which flows from top management’s vision and leadership, and which
requires the full commitment of people to it. Guest (1987, 1989a, 1989b, 1991) believes
that this is a key policy goal for HRM, which is concerned with the ability of the orga-
nization to integrate HRM issues into its strategic plans, to ensure that the various
aspects of HRM cohere, and to encourage line managers to incorporate an HRM
perspective into their decision-making.
Legge (1989) considers that one of the common themes of the typical definitions of
HRM is that human resource policies should be integrated with strategic business
planning. Sisson (1990) suggests that a feature increasingly associated with HRM is a
stress on the integration of HR policies both with one another and with business plan-
ning more generally.
Storey (1989) suggests that: ‘The concept locates HRM policy formulation firmly at
the strategic level and insists that a characteristic of HRM is its internally coherent
approach.’
The commitment-oriented nature of HRM
The importance of commitment and mutuality was emphasized by Walton (1985a) as
follows:
The new HRM model is composed of policies that promote mutuality – mutual goals,
mutual influence, mutual respect, mutual rewards, and mutual responsibility. The theory
is that policies of mutuality will elicit commitment, which in turn will yield both better
economic performance and greater human development.
Guest (1987) wrote that one of the HRM policy goals was the achievement of high
commitment – ‘behavioural commitment to pursue agreed goals, and attitudinal
commitment reflected in a strong identification with the enterprise’.
It was noted by Legge (1995) that human resources ‘may be tapped most effectively
by mutually consistent policies that promote commitment and which, as a conse-
quence, foster a willingness in employees to act flexibly in the interests of the “adap-
tive organization’s” pursuit of excellence’.
But this emphasis on commitment has been criticized from the earliest days of
HRM. Guest (1987) asked: ‘commitment to what?’ and Fowler (1987) has stated:
At the heart of the concept is the complete identification of employees with the aims and
values of the business – employee involvement but on the company’s terms. Power in

the HRM system remains very firmly in the hands of the employer. Is it really possible to
claim full mutuality when at the end of the day the employer can decide unilaterally to
close the company or sell it to someone else?
People as ‘human capital’
The notion that people should be regarded as assets rather than variable costs, in
other words, treated as human capital, was originally advanced by Beer et al (1984).
HRM philosophy, as mentioned by Karen Legge (1995), holds that ‘human resources
are valuable and a source of competitive advantage’. Armstrong and Baron (2002)
stated that:
People and their collective skills, abilities and experience, coupled with their ability to
deploy these in the interests of the employing organization, are now recognized as
making a significant contribution to organizational success and as constituting a signifi-
cant source of competitive advantage.
Unitary philosophy
The HRM approach to employee relations is basically unitary – it is believed that
employees share the same interests as employers. This contrasts with what could be
regarded as the more realistic pluralist view, which says that all organizations contain
a number of interest groups and that the interests of employers and employees do not
necessarily coincide.
Individualistic
HRM is individualistic in that it emphasizes the importance of maintaining links
between the organization and individual employees in preference to operating
through group and representative systems.
HRM as a management-driven activity
HRM can be described as a central, senior management-driven strategic activity that
is developed, owned and delivered by management as a whole to promote the inter-
ests of the organization that they serve. Purcell (1993) thinks that ‘the adoption of
HRM is both a product of and a cause of a significant concentration of power in the
hands of management’, while the widespread use ‘of the language of HRM, if not its
practice, is a combination of its intuitive appeal to managers and, more importantly, a
response to the turbulence of product and financial markets’. He asserts that HRM is
about the rediscovery of management prerogative. He considers that HRM policies

and practices, when applied within a firm as a break from the past, are often associ-
ated with words such as commitment, competence, empowerment, flexibility,
culture, performance, assessment, reward, teamwork, involvement, cooperation,
harmonization, quality and learning. But ‘the danger of descriptions of HRM as
modern best-management practice is that they stereotype the past and idealize the
future’.
Sisson (1990) suggested that: ‘The locus of responsibility for personnel manage-
ment no longer resides with (or is “relegated to”) specialist managers.’ More recently,
Purcell et al (2003) underlined the importance of line management commitment and
capability as the means by which HR policies are brought to life.
Focus on business values
The concept of HRM is largely based on a management and business-oriented philos-
ophy. It is concerned with the total interests of the organization – the interests of the
members of the organization are recognized but subordinated to those of the enter-
prise. Hence the importance attached to strategic integration and strong cultures,
which flow from top management’s vision and leadership, and which require people
who will be committed to the strategy, who will be adaptable to change, and who will
fit the culture. By implication, as Guest (1991) says: ‘HRM is too important to be left to
personnel managers.’
In 1995 Legge noted that HRM policies are adapted to drive business values and
are modified in the light of changing business objectives and conditions. She
describes this process as ‘thinking pragmatism’ and suggests that evidence indicates
more support for the hard versions of HRM than the soft version.
RESERVATIONS ABOUT HRM
For some time HRM was a controversial topic, especially in academic circles. The
main reservations have been that HRM promises more than it delivers and that its
morality is suspect.
HRM promises more than it can deliver
Noon (1992) has commented that HRM has serious deficiencies as a theory:
It is built with concepts and propositions, but the associated variables and hypotheses
are not made explicit. It is too comprehensive… If HRM is labelled a ‘theory’ it raises
expectations about its ability to describe and predict.

Guest (1991) believes that HRM is an ‘optimistic but ambiguous concept’; it is all
hype and hope.
Mabey et al (1998) follow this up by asserting that ‘the heralded outcomes (of HRM)
are almost without exception unrealistically high’. To put the concept of HRM into
practice involves strategic integration, developing a coherent and consistent set of
employment policies, and gaining commitment. This requires high levels of determi-
nation and competence at all levels of management and a strong and effective HR
function staffed by business-oriented people. It may be difficult to meet these criteria,
especially when the proposed HRM culture conflicts with the established corporate
culture and traditional managerial attitudes and behaviour.
Gratton et al (1999) are convinced on the basis of their research that there is:
a disjunction between rhetoric and reality in the area of human resource management
between HRM theory and HRM practice, between what the HR function says it is doing
and that practice as perceived by employers, and between what senior management
believes to be the role of the HR function, and the role it actually plays.
In their conclusions they refer to the ‘hyperbole and rhetoric of human resource
management’.
Caldwell (2004) believes that HRM ‘is an unfinished project informed by a self-
fulfilling vision of what it should be’.
In response to the above comments it is agreed that many organizations that think
they are practising HRM are doing nothing of the kind. It is difficult, and it is best not
to expect too much. Most of the managements who hurriedly adopted performance-
related pay as an HRM device that would act as a lever for change have been sorely
disappointed.
But the research conducted by Guest and Conway (1997) covering a stratified
random sample of 1,000 workers established that a notably high level of HRM was
found to be in place. This contradicts the view that management has tended to ‘talk
up’ the adoption of HRM practices. The HRM characteristics covered by the survey
included the opportunity to express grievances and raise personal concerns on such
matters as opportunities for training and development, communications about busi-
ness issues, single status, effective systems for dealing with bullying and harassment
at work, making jobs interesting and varied, promotion from within, involvement
programmes, no compulsory redundancies, performance-related pay, profit sharing
and the use of attitude surveys.
The morality of HRM
HRM is accused by many academics of being manipulative if not positively immoral.

Willmott (1993) remarks that HRM operates as a form of insidious ‘control by compli-
ance’ when it emphasizes the need for employees to be committed to do what the
organization wants them to do. It preaches mutuality but the reality is that behind the
rhetoric it exploits workers. It is, they say, a wolf in sheep’s clothing (Keenoy, 1990a).
As Legge (1998) pointed out:
Sadly, in a world of intensified competition and scarce resources, it seems inevitable
that, as employees are used as means to an end, there will be some who will lose out.
They may even be in the majority. For these people, the soft version of HRM may be an
irrelevancy, while the hard version is likely to be an uncomfortable experience.
The accusation that HRM treats employees as means to an end is often made.
However, it could be argued that if organizations exist to achieve ends, which they
obviously do, and if those ends can only be achieved through people, which is clearly
the case, the concern of managements for commitment and performance from those
people is not unnatural and is not attributable to the concept of HRM – it existed in
the good old days of personnel management before HRM was invented. What
matters is how managements treat people as ends and what managements provide in
return.
Much of the hostility to HRM expressed by a number of academics is based on the
belief that it is hostile to the interests of workers, ie that it is managerialist. However,
the Guest and Conway (1997) research established that the reports of workers on
outcomes showed that a higher number of HR practices were associated with higher
ratings of fairness, trust and management’s delivery of their promises. Those experi-
encing more HR activities also felt more secure in and more satisfied with their jobs.
Motivation was significantly higher for those working in organizations where more
HR practices were in place. In summary, as commented by Guest (1999b), it appears
that workers like their experience of HRM. These findings appear to contradict the
‘radical critique’ view produced by academics such as Mabey et al (1998) that HRM
has been ineffectual, pernicious (ie managerialist) or both. Some of those who adopt
this stance tend to dismiss favourable reports from workers about HRM on the
grounds that they have been brainwashed by management. But there is no evidence
to support this view. Moreover, as Armstrong (2000a) pointed out:
HRM cannot be blamed or given credit for changes that were taking place anyway. For
example, it is often alleged to have inspired a move from pluralism to unitarism in indus-
trial relations. But newspaper production was moved from Fleet Street to Wapping by
Murdoch, not because he had read a book about HRM but as a means of breaking the
print unions’ control.

Contradictions in the reservations about HRM
Guest (1999a) has suggested that there are two contradictory concerns about HRM.
The first as formulated by Legge (1995, 1998) is that while management rhetoric may
express concern for workers, the reality is harsher. Keenoy (1997) complains that: ‘The
real puzzle about HRMism is how, in the face of such apparently overwhelming crit-
ical “refutation”, it has secured such influence and institutional presence.’
Other writers, however, simply claim that HRM does not work. Scott (1994) for
example, finds that both management and workers are captives of their history and
find it very difficult to let go of their traditional adversarial orientations. But these
contentions are contradictory. Guest (1999b) remarks that, ‘It is difficult to treat HRM
as a major threat (though what it is a threat to is not always made explicit) deserving
of serious critical analysis while at the same time claiming that it is not practiced or is
ineffective.’
HRM AND PERSONNEL MANAGEMENT
A debate about the differences, if any, between HRM and personnel management
went on for some time. It has died down recently, especially as the terms HRM and
HR are now in general use both in their own right and as synonyms for personnel
management. But understanding of the concept of HRM is enhanced by analysing
what the differences are and how traditional approaches to personnel management
have evolved to become the present day practices of HRM.
Some commentators (Hope-Hailey et al, 1998; Keenoy, 1990b; Legge, 1989, 1995;
Sisson, 1990; Storey, 1993) have highlighted the revolutionary nature of HRM. Others
have denied that there is any significant difference in the concepts of personnel
management and HRM. Torrington (1989) suggested that: ‘Personnel management
has grown through assimilating a number of additional emphases to produce an even
richer combination of experience… HRM is no revolution but a further dimension to
a multi-faceted role.’
The conclusion based on interviews with HR and personnel directors reached by
Gennard and Kelly (1994) on this issue was that ‘it is six of one and half a dozen of the
other and it is a sterile debate’. An earlier answer to this question was made by
Armstrong (1987):
HRM is regarded by some personnel managers as just a set of initials or old wine in new
bottles. It could indeed be no more and no less than another name for personnel
management, but as usually perceived, at least it has the virtue of emphasizing the virtue
of treating people as a key resource, the management of which is the direct concern of

top management as part of the strategic planning processes of the enterprise. Although
there is nothing new in the idea, insufficient attention has been paid to it in many orga-
nizations.
The similarities and differences between HRM and personnel management are
summarized in Table 1.1.
Similarities Differences
1. Personnel management strategies, like 1. HRM places more emphasis on strategic
HRM strategies, flow from the business fit and integration.
strategy. 2. HRM is based on a management and
2. Personnel management, like HRM, business orientated philosophy.
recognizes that line managers are 3. HRM attaches more importance to the
responsible for managing people. The management of culture and the
personnel function provides the necessary achievement of commitment (mutuality).
advice and support services to enable 4. HRM places greater emphasis on the
managers to carry out their responsibilities. role of line managers as the implementers
3. The values of personnel management and of HR policies.
at least the ‘soft’ version of HRM are 5. HRM is a holistic approach concerned
identical with regard to ‘respect for the with the total interests of the business –
individual’, balancing organizational and the interests of the members of the
individual needs, and developing people organization are recognized but
to achieve their maximum level of subordinated to those of the enterprise.
competence both for their own satisfaction 6. HR specialists are expected to be business
and to facilitate the achievement of partners rather than personnel
organizational objectives. administrators.
4. Both personnel management and HRM 7. HRM treats employees as assets not costs.
recognize that one of their most essential
functions is that of matching people to
ever-changing organizational
requirements – placing and developing the
right people in and for the right jobs.
5. The same range of selection, competence
analysis, performance management,
training, management development and
reward management techniques are used
both in HRM and personnel management.
6. Personnel management, like the ‘soft’
version of HRM, attaches importance to
the processes of communication and
participation within an employee
relations system.
Table 1.1 Similarities and differences between HRM and personnel management

The differences between personnel management and human resource management
appear to be substantial but they can be seen as a matter of emphasis and approach
rather than one of substance. Or, as Hendry and Pettigrew (1990) put it, HRM can be
perceived as a ‘perspective on personnel management and not personnel manage-
ment itself’.
HOW HR IMPACTS ON ORGANIZATIONAL
PERFORMANCE
The assumption underpinning the practice of HRM is that people are the organiza-
tion’s key resource and organizational performance largely depends on them. If,
therefore, an appropriate range of HR policies and processes are developed and
implemented effectively, then HR will make a substantial impact on firm perfor-
mance.
The Holy Grail sought by many commentators on human resource management is
to establish that a clear positive link between HRM practices and organizational per-
formance exists. There has been much research, as summarized in Table 1.2, over the
last decade or so that has attempted to answer two basic questions: ‘Do HR practices
make a positive impact on organizational performance?’ ‘If so, how is the impact
achieved?’ The second question is the most important one. It is not enough to justify
HRM by proving that it is a good thing. What counts is what can be done to ensure
that it is a good thing. This is the ‘black box’ mentioned by Purcell et al (2003) that lies
between intentions and outcomes.
Ulrich (1997a) has pointed out that: ‘HR practices seem to matter; logic says it is so;
survey findings confirm it. Direct relationships between investment and attention to
HR practices are often fuzzy, however, and vary according to the population sampled
and the measures used’.
Purcell et al (2003) have cast doubts on the validity of some of the attempts through
research to make the connection:
Our study has demonstrated convincingly that research which only asks about the
number and extent of HR practices can never be sufficient to understand the link
between HR practices and business performance. As we have discussed it is misleading
to assume that simply because HR policies are present that they will be implemented as
intended.
Further comments about attempts to trace the link have been made by Truss (2001)
who, following research in Hewlett-Packard, remarked that:

Our findings did lend strong support to the argument put forward by Mueller (1996) that
the informal organization has a key role to play in the HRM process such that informal
practice and norms of behaviour interact with formal HR policies... We cannot consider
how HRM and performance are linked without analysing, in some detail, how policy is
turned into practice through the lens of the informal organization.
Research outcomes
A considerable amount of research has been carried out to establish the link between
HRM and firm performance. The outcomes of some of the main projects are summa-
rized in Table 1.2.
Researcher(s) Methodology Outcomes
Arthur (1990, Data from 30 US strip mills used to Firms with a high commitment
1992, 1994) assess impact on labour efficiency strategy had significantly higher
and scrap rate by reference to the levels of both productivity and
existence of either a high quality than those with a
commitment strategy* or a control strategy.
control strategy*.
Huselid (1995) Analysis of the responses of 968 US Productivity is influenced by
firms to a questionnaire exploring employee motivation; financial
the use of high performance work performance is influenced by
practices*, the development of employee skills, motivation and
synergies between them and the organizational structures.
alignment of these practices with
the competitive strategy.
Huselid and An index of HR systems in 740 Firms with high values on the
Becker (1996) firms was created to indicate the index had economically and
degree to which each firm adopted statistically higher levels of
a high performance work system. performance.
Becker et al Outcomes of a number of research High performance systems make
(1997) projects were analysed to assess the an impact as long as they are
strategic impact on shareholder embedded in the management
value of high performance work infrastructure.
systems.
Table 1.2 Outcomes of research on the link between HR and organizational perfor-
mance

Patterson et al The research examined the link HR practices explained significant
(1997) between business performance and variations in profitability and
organization culture and the use of productivity (19% and 18%
a number of HR practices. respectively). Two HR practices
were particularly significant: (1) the
acquisition and development of
employee skills and (2) job design
including flexibility, responsibility,
variety and the use of formal teams.
Thompson (1998) A study of the impact of high The number of HR practices and
performance work practices such as the proportion of the workforce
teamworking, appraisal, job rotation, covered appeared to be the key
broad-banded grade structures and differentiating factor between more
sharing of business information in and less successful firms.
623 UK aerospace establishments.
The 1998 An analysis of the survey which A strong assocation exists between
Workplace sampled some 2,000 workplaces HRM and both employee
Employee and obtained the views of about attitudes and workplace
Relations Survey 28,000 employees. performance.
(as analysed by
Guest et al
2000a)
The Future of 835 private sector organizations A greater use of HR practices is
Work Survey, were surveyed and interviews were associated with higher levels of
Guest et al carried out with 610 HR employee commitment and
(2000b) professionals and 462 chief contribution and is in turn linked
executives. to higher levels of productivity
and quality of services.
Purcell et al A University of Bath longitudinal The most successful companies had
(2003) study of 12 companies to establish what the researchers called ‘the big
how people management impacts on idea’. The companies had a clear
organizational performance. vision and a set of integrated values
which were embedded, enduring,
collective, measured and managed.
They were concerned with
sustaining performance and
flexibility. Clear evidence existed
between positive attitudes towards
HR policies and practices, levels of
satisfaction, motivation and
Table 1.2 continued
continued

How HR makes an impact
In Guest et al (2000b) the relationship between HRM and performance was modelled
as shown in Figure 1.4.
commitment, and operational
performance. Policy and practice
implementation (not the number
of HR practices adopted) is the
vital ingredient in linking people
management to business
performance and this is primarily
the task of line managers.
* In the US research projects set out in Table 1.2 reference is made to the impact made by the following
strategies: A commitment strategy – a strategy, as described by Walton (1985b) which promotes mutuality
between employers and employees. A control strategy – as described by Walton (1985b), one in which the
aim is to establish order, exercise control and achieve efficiency in the application of the workforce but
where employees did not have a voice except through their unions. High performance work systems – these
aim to impact on performance through its people by the use of such practices as rigorous recruitment and
selection procedures, extensive and relevant training and management development activities, incentive
pay systems and performance management processes.
Table 1.2 continued
Business
strategy
HR strategy
Quality of
goods and
services
Productivity
HR effectiveness
Financial
performance
HR practices
HR outcomes
Employee:
competence
commitment
flexibility
Figure 1.4 Model of the link between HRM and performance (Source: Guest et al,
2000b)

The messages from research, especially that carried out by Purcell et al (2003), are that
HR can make an impact by leading or contributing to:
● the development and successful implementation of high performance work prac-
tices, particularly those concerned with job and work design, flexible working,
resourcing (recruitment and selection and talent management), employee devel-
opment (increasing skills and extending the skills base), reward, and giving
employees a voice;
● the formulation and embedding of a clear vision and set of values (the big idea);
● the development of a positive psychological contract and means of increasing the
motivation and commitment of employees;
● the formulation and implementation of policies which, in the words of Purcell et al
(2003) meet the needs of individuals and ‘create a great place to work’;
● the provision of support and advice to line managers on their role in imple-
menting HR policies and practices;
● the effective management of change.
HRM IN CONTEXT
HRM processes take place within the context of the internal and external environ-
ment of the organization. They will be largely contingent on the environmental
factors that affect them.
Contingency theory
Contingency theory tells us that definitions of aims, policies and strategies, lists of
activities, and analyses of the role of the HR department are valid only if they are
related to the circumstances of the organization. Descriptions in books such as this
can only be generalizations that suggest approaches and provide guidelines for
action; they cannot be prescriptive in the sense of laying down what should be done.
Contingency theory is essentially about the need to achieve fit between what the
organization is and wants to become (its strategy, culture, goals, technology, the
people it employs and its external environment) and what the organization does
(how it is structured, and the processes, procedures and practices it puts into effect).
Contextual factors
There are three main contextual factors that influence HR policies and practices.

1. Technology
The technology of the business exerts a major influence on the internal environment –
how work is organized, managed and carried out. The introduction of new tech-
nology may result in considerable changes to systems and processes. Different skills
are required and new methods of working are developed. The result may be an exten-
sion of the skills base of the organization and its employees, including multiskilling
(ensuring that people have a range of skills that enable them to work flexibly on a
variety of tasks, often within a teamworking environment). But it could result in de-
skilling and a reduction in the number of jobs (downsizing).
New technology can therefore present a considerable threat to employees. The
world of work has changed in many ways. Knowledge workers are employed in
largely computerized offices and laboratories, and technicians work in computer
integrated manufacturing systems. They may have to be managed differently from
the clerks or machine operators they displace. The service industries have become
predominant and manufacturing is in decline. New work environments such as call
centres have become common and tele-working (working from home with a net-
worked computer) is increasing.
2. Competitive pressures
Global competition in mature production and service sectors is increasing. This is
assisted by easily transferable technology and reductions in international trade
barriers. Customers are demanding more as new standards are reached through
international competition. Organizations are reacting to this competition by becom-
ing ‘customer-focused’, speeding up response times, emphasizing quality and contin-
uous improvement, accelerating the introduction of new technology, operating more
flexibly and ‘losing cost’.
The pressure has been for businesses to become ‘lean organizations’, downsizing
and cutting out layers of management and supervision. They are reducing permanent
staff to a core of essential workers, increasing the use of peripheral workers (sub-
contractors, temporary staff) and ‘outsourcing’ work to external service providers.
The aim is to reduce employment costs and enable the enterprise easily to increase or
reduce the numbers available for work in response to fluctuations in the level of
business activity. They become the so-called ‘flexible firms’. The ultimate develop-
ment of this process is the ‘virtual’ firm or corporation, where through the exten-
sive use of information technology a high proportion of marketing and professional
staff mainly work from home, only coming into the office on special occasions
to occupy their ‘hot desks’, and spending more time with their customers or
clients.

Another response to competitive pressures is business process re-engineering
(BPR), which examines the process that contains and links those functions together
from initiation to completion. It looks at processes in organizations horizontally to
establish how they can be integrated more effectively as well as streamlined. It can
therefore form the basis for an organizational redesign exercise. From an HR point of
view, the outcome of a BPR exercise may well be the need to attract or develop people
with new skills as well as pressure for the improvement of team working. It also
emphasizes the importance of an integrated – a coherent – approach to the develop-
ment and implementation of HR policies and employment practices. Re-engineering
often promises more than it achieves and is not regarded as highly as it once was, not
least because it often neglected the human aspects, giving insufficient attention to the
management of change and retraining staff.
3. Responses affecting people
The responses to the increased use of technology and to economic and competitive
pressures have changed the nature of people management in a number of ways.
These include slimmer and flatter organization structures in which cross-functional
operations and teamworking have become more important, more flexible working
patterns, total quality and lean production initiatives, and the decentralization and
devolvement of decision-making.
The challenge to HRM
Ulrich (1998) suggests that environmental and contextual changes present a number
of competitive challenges to organizations that mean that HR has to be involved in
helping to build new capabilities. These comprise:
● Globalization, which requires organizations to move people, ideas, products and
information around the world to meet local needs. New and important ingredi-
ents must be added to the mix when making strategy: volatile political situations,
contentious global trade issues, fluctuating exchange rates and unfamiliar
cultures.
● Profitability through growth – the drive for revenue growth means that companies
must be creative and innovative and this means encouraging the free flow of
information and shared learning among employees.
● Technology – the challenge is to make technology a viable, productive part of the
work setting.
● Intellectual capital – this is the source of competitive advantage for organizations.
The challenge is to ensure that firms have the capability to find, assimilate,

compensate and retain human capital in the shape of the talented individuals
they need who can drive a global organization that is both responsive to its
customers and ‘the burgeoning opportunities of technology’. They have also to
consider how the social capital of the organization – the ways in which people
interact – can be developed. Importantly, organizations have to focus on organi-
zational capital – the knowledge they own and how it should be managed.
● Change, change and more change – the greatest challenge companies face is
adjusting to – indeed, embracing – non-stop change. They must be able to ‘learn
rapidly and continuously, and take on new strategic imperatives faster and more
comfortably’.

Human capital management (HCM) has been described as ‘a paradigm shift’ from
the traditional approach to human resource management (Kearns, 2005b) – a large
claim. It is considered in this chapter initially by defining the concept of human
capital management and its relationship to the concept of human resource manage-
ment. To understand HCM it is necessary to know about the concept of human
capital, which is the next section heading. The chapter is completed with an analysis
of the processes involved in HCM including a discussion of human capital measure-
ment and reporting.
HUMAN CAPITAL MANAGEMENT DEFINED
Human capital management (HCM) is concerned with obtaining, analysing and
reporting on data that informs the direction of value-adding people management,
strategic investment and operational decisions at corporate level and at the level of
front line management. The defining characteristic of HCM is this use of metrics to
guide an approach to managing people that regards them as assets and emphasizes
that competitive advantage is achieved by strategic investments in those assets
through employee engagement and retention, talent management and learning and
development programmes.
2

The Accounting for People Task Force Report (2003) stated that HCM involves
the systematic analysis, measurement and evaluation of how people policies and
practices create value. The report defined HCM as ‘an approach to people manage-
ment that treats it as a high level strategic issue rather than an operational matter “to
be left to the HR people” ’. The Task Force expressed the view that HCM ‘has
been under-exploited as a way of gaining competitive edge’. As John Sunderland,
Task Force member and Executive Chairman of Cadbury Schweppes plc commented:
‘An organization’s success is the product of its people’s competence. That link
between people and performance should be made visible and available to all stake-
holders.’
Nalbantian et al (2004) emphasize the measurement aspect of HCM. They define
human capital as, ‘The stock of accumulated knowledge, skills, experience, creativity
and other relevant workforce attributes’ and suggest that human capital management
involves ‘putting into place the metrics to measure the value of these attributes and
using that knowledge to effectively manage the organization’. HCM is defined by
Kearns (2005b) as ‘The total development of human potential expressed as organiza-
tional value.’ He believes that ‘HCM is about creating value through people’ and that
it is ‘a people development philosophy, but the only development that means
anything is that which is translated into value’.
HUMAN CAPITAL MANAGEMENT AND HUMAN
RESOURCE MANAGEMENT
In the opinion of Mayo (2001) the essential difference between HCM and HRM is that
the former treats people as assets while the latter treats them as costs. Kearns (2005b)
believes that in HCM ‘people are value adders, not overheads’ while in HRM ‘people
are (treated as) a significant cost and should be managed accordingly’. According to
Kearns, in HRM ‘the HR team is seen as a support service to the line’ – HR is based
around the function and the HR team performs ‘a distinct and separate role from
other functions’. Conversely, ‘HCM is clearly seen and respected as an equal business
partner at senior levels’ and is ‘holistic, organization-wide and systems-based’ as well
as being strategic and concerned with adding value.
The claim that in HRM employees are treated as costs is not supported by the
descriptions of the concept of HRM produced by American writers such as Beer et al
(1984). In one of the seminal texts on human resource management, they emphasized
the need for: ‘a longer-term perspective in managing people and consideration of
people as potential assets rather than merely a variable cost’. Fombrun et al (1984), in
the other seminal text, quite explicitly presented workers as a key resource that

managers use to achieve competitive advantage for their companies. Grant (1991)
lists the main characteristics of human resources in his general classification of a
firm’s potential resources as follows:
● The training and expertise of employees determines the skills available to the
firm.
● The adaptability of employees determines the strategic flexibility of the firm.
● The commitment and loyalty of employees determine the firm’s ability to main-
tain competitive advantage.
Cappelli and Singh (1992) propose that competitive advantage arises from firm-
specific, valuable resources that are difficult to imitate, and stress ‘the role of human
resource policies in the creation of valuable, firm-specific skills’.
Other writers confirmed this view. For example:
HRM is an ‘approach to labour management which treats labour as a valued asset rather
than a variable cost and which consequently counsels investment in the labour resource
through training and development and through measures designed to attract and retain
a committed workforce’. (Storey, 1989)
Human resource management is a distinctive approach to employment management
that seeks to obtain competitive advantage through the strategic deployment of a highly
committed and capable workforce, using an integrated array of cultural, structural and
personnel techniques. (Storey, 1995)
The HRM argument is that people… are not to be seen as a cost, but as an asset in
which to invest, so adding to their inherent value. (Torrington, 1989, emphasis in the
original)
Of course, all these commentators are writing about HRM as a belief system, not
about how it works in practice. The almost universal replacement of the term
‘personnel management’ with HR or HRM does not mean that everyone with the job
title of HR director or manager is basing their approach on the HRM philosophy.
Guest commented in 1991 that HRM was ‘all hype and hope’.
A survey conducted by Caldwell (2004) provided some support to this view by
establishing that the five most important HR policy areas identified by respondents
were also the five in which the least progress had been made. For example, while 89
per cent of respondents said the most important HR policy was ‘managing people as
assets which are fundamental to the competitive advantage of the organization’, only
37 per cent stated that they had made any progress in implementing it.
Human capital management ❚ 31

However, research conducted by Hoque and Moon (2001) found that there
were significant differences between the activities of those described as HR specialists
and those described as personnel specialists. For example, workplace-level
strategic plans are more likely to emphasize employee development in workplaces
with an HR specialist rather than a personnel specialist, and HR specialists are
more likely to be involved in the development of strategic plans than are personnel
specialists.
Both HRM in its proper sense and HCM as defined above treat people as assets.
Although, as William Scott-Jackson, Director of the Centre for Applied HR Research
at Oxford Brookes University argues (Oracle, 2005), ‘You can’t simply treat people as
assets, because that depersonalizes them and leads to the danger that they are viewed
in purely financial terms, which does little for all-important engagement.’
However, there is more to both HRM and HCM than simply treating people as
assets. Each of them also focuses on the importance of adopting an integrated and
strategic approach to managing people, which is the concern of all the stakeholders in
an organization, not just the people management function. So how does the concept
of HCM reinforce or add to the concept of HRM? The answers to that question are
that HCM:
● draws attention to the importance of what Kearns (2005b) calls ‘management
through measurement’, the aim being to establish a clear line of sight between HR
interventions and organizational success;
● strengthens the HRM belief that people are assets rather than costs;
● focuses attention on the need to base HRM strategies and processes on the
requirement to create value through people and thus further the achievement of
organizational goals;
● reinforces the need to be strategic;
● emphasizes the role of HR specialists as business partners;
● provides guidance on what to measure and how to measure;
● underlines the importance of using the measurements to prove that superior
people management is delivering superior results and to indicate the direction in
which HR strategy needs to go.
The concept of HCM complements and strengthens the concept of HRM. It does not
replace it. Both HCM and HRM can be regarded as vital components in the process of
people management.

THE CONCEPT OF HUMAN CAPITAL
Individuals generate, retain and use knowledge and skill (human capital) and create
intellectual capital. Their knowledge is enhanced by the interactions between them
(social capital) and generates the institutionalized knowledge possessed by an orga-
nization (organizational capital). These concepts of human, intellectual, social and
organizational capital are explained below.
Human capital
The term ‘human capital’ was originated by Schultz (1961) who elaborated his
concept in 1981 as follows: ‘Consider all human abilities to be either innate or
acquired. Attributes… which are valuable and can be augmented by appropriate
investment will be human capital.’
A more detailed definition was put forward by Bontis et al (1999) as follows:
Human capital represents the human factor in the organization; the combined intelli-
gence, skills and expertise that gives the organization its distinctive character. The
human elements of the organization are those that are capable of learning, changing,
innovating and providing the creative thrust which if properly motivated can ensure the
long-term survival of the organization.
Scarborough and Elias (2002) believe that: ‘The concept of human capital is most
usefully viewed as a bridging concept – that is, it defines the link between HR prac-
tices and business performance in terms of assets rather than business processes.’
They point out that human capital is to a large extent ‘non-standardized, tacit,
dynamic, context dependent and embodied in people’. These characteristics make it
difficult to evaluate human capital bearing in mind that the ‘features of human
capital that are so crucial to firm performance are the flexibility and creativity of indi-
viduals, their ability to develop skills over time and to respond in a motivated way to
different contexts’.
It is indeed the knowledge, skills and abilities of individuals that create value,
which is why the focus has to be on means of attracting, retaining, developing and
maintaining the human capital they represent. Davenport (1999) comments that:
People possess innate abilities, behaviours and personal energy and these elements
make up the human capital they bring to their work. And it is they, not their employers,
who own this capital and decide when, how and where they will contribute it. In other
words, they can make choices. Work is a two-way exchange of value, not a one-way
exploitation of an asset by its owner.

The choices they make include how much discretionary behaviour they are prepared
to exercise in carrying out their role (discretionary behaviour refers to the discretion
people at work can exercise about the way they do their job and the amount of effort,
care, innovation and productive behaviour they display). They can also choose
whether or not to remain with the organization.
Intellectual capital
The concept of human capital is associated with the overarching concept of intellec-
tual capital, which is defined as the stocks and flows of knowledge available to an
organization. These can be regarded as the intangible resources associated with
people who, together with tangible resources (money and physical assets), comprise
the market or total value of a business. Bontis (1996, 1998) defines intangible
resources as the factors other than financial and physical assets that contribute to the
value-generating processes of a firm and are under its control.
Social capital
Social capital is another element of intellectual capital. It consists of the knowledge
derived from networks of relationships within and outside the organization. The
concept of social capital has been defined by Putnam (1996) as ‘the features of social
life – networks, norms and trust – that enable participants to act together more effec-
tively to pursue shared objectives’. The World Bank (2000) offers the following defin-
ition:
Social capital refers to the institutions, relationships and norms that shape the quality
and quantity of a society’s social interactions... Social capital is not just the sum of the
institutions that underpin a society – it is the glue that holds them together.
It is necessary to capture individual knowledge through knowledge management
processes, as described in Chapter 12, but it is equally important to take into account
social capital considerations, that is, the ways in which knowledge is developed
through interaction between people. Bontis et al (1999) point out that it is flows as
well as stocks that matter. Intellectual capital develops and changes over time and a
significant part is played in these processes by people acting together.
Organizational capital
Organizational capital is the institutionalized knowledge possessed by an organiza-
tion, which is stored in databases, manuals, etc (Youndt, 2000). It is often called

structural capital (Edvinson and Malone, 1997), but the term ‘organizational capital’ is
preferred by Youndt because, he argues, it conveys more clearly that this is the
knowledge that the organization actually owns.
The significance of human capital theory
The added value that people can contribute to an organization is emphasized by
human capital theory. It regards people as assets and stresses that investment by
organizations in people will generate worthwhile returns. The theory therefore
underpins the philosophies of human resource management and human capital
management.
Human capital theory is associated with the resource-based view of the firm as
developed by Barney (1991). This proposes that sustainable competitive advantage is
attained when the firm has a human resource pool that cannot be imitated or substi-
tuted by its rivals. Boxall (1996) refers to this situation as one that confers ‘human
capital advantage’. But he also notes (1996 and 1999), that a distinction should be
made between ‘human capital advantage’ and ‘human process advantage’. The
former results from employing people with competitively valuable knowledge and
skills, much of it tacit. The latter, however, follows from the establishment of:
difficult to imitate, highly evolved processes within the firm, such as cross-departmental
co-operation and executive development. Accordingly, ‘human resource advantage’,
the superiority of one firm’s labour management over another’s, can be thought of as the
product of its human capital and human process advantages.
For the employer, investments in training and developing people is a means of
attracting and retaining human capital as well as getting better returns from those
investments. These returns are expected to be improvements in performance, produc-
tivity, flexibility and the capacity to innovate that should result from enlarging the
skill base and increasing levels of knowledge and competence. Schuller (2000)
suggests that: ‘The general message is persuasive: skills, knowledge and competences
are key factors in determining whether organizations and nations will prosper.’ This
point is also made powerfully by Reich (1991).
But Davenport (1999) has some cautionary words about the asset-based content of
human capital theory. He argues that workers should not be treated as passive assets
to be bought, sold and replaced at the whim of their owners – increasingly, they
actively control their own working lives. Workers, especially knowledge workers,
may regard themselves as free agents who can choose how and where they invest
their talents, time and energy. He suggests that the notion that companies own
human assets as they own machines is unacceptable in principle and inapplicable in

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