The document discusses the strategic view of human resource management and treating employees as valuable assets. It states that effective organizations recognize that employees have value, similar to physical and capital assets, and that employees can provide a source of sustainable competitive advantage when appropriate policies and programs are applied. It also discusses factors that influence an organization's investment orientation toward human capital and treating people as central to the mission and strategy.

1. CHAPTER 1:
AN INVESTMENT
PERSPECTIVE OF
HUMAN
RESOURCE
MANAGEMENT
Copyright © 2005 South-Western. All rights reserved.

2. Copyright © 2005 South-
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The Strategic View of Human ResourcesThe Strategic View of Human ResourcesThe Strategic View of Human ResourcesThe Strategic View of Human Resources
• Employees areEmployees are human assetshuman assets
– Increase in value to organization and marketplace whenIncrease in value to organization and marketplace when
investments of appropriate policies & programs are appliedinvestments of appropriate policies & programs are applied
• Effective organizations recognize that employeesEffective organizations recognize that employees
have valuehave value
– Much as organization’s physical & capital assets have valueMuch as organization’s physical & capital assets have value
• Employees are valuable source ofEmployees are valuable source of sustainablesustainable
competitive advantagecompetitive advantage
• Employees areEmployees are human assetshuman assets
– Increase in value to organization and marketplace whenIncrease in value to organization and marketplace when
investments of appropriate policies & programs are appliedinvestments of appropriate policies & programs are applied
• Effective organizations recognize that employeesEffective organizations recognize that employees
have valuehave value
– Much as organization’s physical & capital assets have valueMuch as organization’s physical & capital assets have value
• Employees are valuable source ofEmployees are valuable source of sustainablesustainable
competitive advantagecompetitive advantage

3. Copyright © 2005 South-
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Sources of Employee ValueSources of Employee ValueSources of Employee ValueSources of Employee Value
• Technical KnowledgeTechnical Knowledge
– Markets, processes, customers, environmentMarkets, processes, customers, environment
• Ability to Learn and GrowAbility to Learn and Grow
– Openness to new ideasOpenness to new ideas
– Acquisition of knowledge & skillsAcquisition of knowledge & skills
• Decision Making CapabilitiesDecision Making Capabilities
• MotivationMotivation
• CommitmentCommitment
• TeamworkTeamwork
– Interpersonal skills, leadership abilityInterpersonal skills, leadership ability
• Technical KnowledgeTechnical Knowledge
– Markets, processes, customers, environmentMarkets, processes, customers, environment
• Ability to Learn and GrowAbility to Learn and Grow
– Openness to new ideasOpenness to new ideas
– Acquisition of knowledge & skillsAcquisition of knowledge & skills
• Decision Making CapabilitiesDecision Making Capabilities
• MotivationMotivation
• CommitmentCommitment
• TeamworkTeamwork
– Interpersonal skills, leadership abilityInterpersonal skills, leadership ability

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Adopting an Investment PerspectiveAdopting an Investment PerspectiveAdopting an Investment PerspectiveAdopting an Investment Perspective
• Determines how to best invest in peopleDetermines how to best invest in people
• CostsCosts
– Out-of-pocketOut-of-pocket
– OpportunityOpportunity
• Human assets become competitive advantageHuman assets become competitive advantage
• Required skills become less manual, moreRequired skills become less manual, more
knowledge-basedknowledge-based
• Appropriate, integrated, strategy-consistentAppropriate, integrated, strategy-consistent
approach is neededapproach is needed
• Determines how to best invest in peopleDetermines how to best invest in people
• CostsCosts
– Out-of-pocketOut-of-pocket
– OpportunityOpportunity
• Human assets become competitive advantageHuman assets become competitive advantage
• Required skills become less manual, moreRequired skills become less manual, more
knowledge-basedknowledge-based
• Appropriate, integrated, strategy-consistentAppropriate, integrated, strategy-consistent
approach is neededapproach is needed

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A DilemmaA DilemmaA DilemmaA Dilemma
• Failure to invest in employees causesFailure to invest in employees causes
– InefficiencyInefficiency
– Weakening of organization’s competitiveWeakening of organization’s competitive
positionposition
• Human assets are risky investmentHuman assets are risky investment
• Require extra effort to ensure that theyRequire extra effort to ensure that they
are not lostare not lost
• Failure to invest in employees causesFailure to invest in employees causes
– InefficiencyInefficiency
– Weakening of organization’s competitiveWeakening of organization’s competitive
positionposition
• Human assets are risky investmentHuman assets are risky investment
• Require extra effort to ensure that theyRequire extra effort to ensure that they
are not lostare not lost

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Exhibit 1-2Exhibit 1-2
Types of Organizational Assets/CapitalTypes of Organizational Assets/Capital
Exhibit 1-2Exhibit 1-2
Types of Organizational Assets/CapitalTypes of Organizational Assets/Capital

7. Copyright © 2005 South-
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Research FindingsResearch FindingsResearch FindingsResearch Findings
• HR practices directly related to profitability &HR practices directly related to profitability &
market valuemarket value
• Primary reason for profitability:Primary reason for profitability:
– Effective management of human capitalEffective management of human capital
• Integrated management of human capital canIntegrated management of human capital can
result in 47% increase in market valueresult in 47% increase in market value
• Top 10% of organizations studied experiencedTop 10% of organizations studied experienced
391% return on investment in management of391% return on investment in management of
human capitalhuman capital
• HR practices directly related to profitability &HR practices directly related to profitability &
market valuemarket value
• Primary reason for profitability:Primary reason for profitability:
– Effective management of human capitalEffective management of human capital
• Integrated management of human capital canIntegrated management of human capital can
result in 47% increase in market valueresult in 47% increase in market value
• Top 10% of organizations studied experiencedTop 10% of organizations studied experienced
391% return on investment in management of391% return on investment in management of
human capitalhuman capital

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Exhibit 1-3Exhibit 1-3
HR Value ChainHR Value Chain
Exhibit 1-3Exhibit 1-3
HR Value ChainHR Value Chain

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HR Metrics Are ComplexHR Metrics Are ComplexHR Metrics Are ComplexHR Metrics Are Complex
• 90% of Fortune 500 organizations evaluate90% of Fortune 500 organizations evaluate
HR operations on basis of three metrics:HR operations on basis of three metrics:
– Employee retention and turnoverEmployee retention and turnover
– Corporate moraleCorporate morale
– Employee satisfactionEmployee satisfaction
• These metrics do not necessarily illustrateThese metrics do not necessarily illustrate
how HR impactshow HR impacts
– ProfitsProfits
– Shareholder valueShareholder value
• 90% of Fortune 500 organizations evaluate90% of Fortune 500 organizations evaluate
HR operations on basis of three metrics:HR operations on basis of three metrics:
– Employee retention and turnoverEmployee retention and turnover
– Corporate moraleCorporate morale
– Employee satisfactionEmployee satisfaction
• These metrics do not necessarily illustrateThese metrics do not necessarily illustrate
how HR impactshow HR impacts
– ProfitsProfits
– Shareholder valueShareholder value

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Mercer Model of Measuring HR ImpactMercer Model of Measuring HR ImpactMercer Model of Measuring HR ImpactMercer Model of Measuring HR Impact
• Identify problem HR can impactIdentify problem HR can impact
• Calculate actual cost of problemCalculate actual cost of problem
• Choose HR solution that addresses problemChoose HR solution that addresses problem
• Calculate cost of solutionCalculate cost of solution
• Calculate value of improvement 6 to 24 monthsCalculate value of improvement 6 to 24 months
after implementationafter implementation
• Calculate specific return on investmentCalculate specific return on investment
• ROI in human assets often not realized until someROI in human assets often not realized until some
time in futuretime in future
• Identify problem HR can impactIdentify problem HR can impact
• Calculate actual cost of problemCalculate actual cost of problem
• Choose HR solution that addresses problemChoose HR solution that addresses problem
• Calculate cost of solutionCalculate cost of solution
• Calculate value of improvement 6 to 24 monthsCalculate value of improvement 6 to 24 months
after implementationafter implementation
• Calculate specific return on investmentCalculate specific return on investment
• ROI in human assets often not realized until someROI in human assets often not realized until some
time in futuretime in future

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Exhibit 1-4Exhibit 1-4
Factors Influencing InvestmentFactors Influencing Investment
OrientationOrientation
Exhibit 1-4Exhibit 1-4
Factors Influencing InvestmentFactors Influencing Investment
OrientationOrientation

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Investment-Oriented OrganizationInvestment-Oriented OrganizationInvestment-Oriented OrganizationInvestment-Oriented Organization
• Sees people as central to mission & strategySees people as central to mission & strategy
• Mission statement & strategic objectivesMission statement & strategic objectives
espouse value of human assets in achievingespouse value of human assets in achieving
goalsgoals
• Management philosophy encouragingManagement philosophy encouraging
development & retention of human assetsdevelopment & retention of human assets
• Does not treat human assets in same waysDoes not treat human assets in same ways
as physical assetsas physical assets
• Sees people as central to mission & strategySees people as central to mission & strategy
• Mission statement & strategic objectivesMission statement & strategic objectives
espouse value of human assets in achievingespouse value of human assets in achieving
goalsgoals
• Management philosophy encouragingManagement philosophy encouraging
development & retention of human assetsdevelopment & retention of human assets
• Does not treat human assets in same waysDoes not treat human assets in same ways
as physical assetsas physical assets

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Investment Orientation FactorsInvestment Orientation FactorsInvestment Orientation FactorsInvestment Orientation Factors
• Senior Management Values & ActionsSenior Management Values & Actions
– Managers need “investment orientation” towardManagers need “investment orientation” toward
peoplepeople
• Attitude Toward RiskAttitude Toward Risk
– Investment in human resources inherently riskierInvestment in human resources inherently riskier
– Human assets never absolutely “owned”Human assets never absolutely “owned”
• Nature of Skills Needed by EmployeesNature of Skills Needed by Employees
– The more marketable employee skills, the riskier theThe more marketable employee skills, the riskier the
firm’s investment in skill developmentfirm’s investment in skill development
• Senior Management Values & ActionsSenior Management Values & Actions
– Managers need “investment orientation” towardManagers need “investment orientation” toward
peoplepeople
• Attitude Toward RiskAttitude Toward Risk
– Investment in human resources inherently riskierInvestment in human resources inherently riskier
– Human assets never absolutely “owned”Human assets never absolutely “owned”
• Nature of Skills Needed by EmployeesNature of Skills Needed by Employees
– The more marketable employee skills, the riskier theThe more marketable employee skills, the riskier the
firm’s investment in skill developmentfirm’s investment in skill development

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Investment Orientation FactorsInvestment Orientation FactorsInvestment Orientation FactorsInvestment Orientation Factors
• Utilitarian (“Bottom Line”) MentalityUtilitarian (“Bottom Line”) Mentality
– Attempt made to quantify employee worth throughAttempt made to quantify employee worth through
cost-benefit analysiscost-benefit analysis
– ““Soft” benefits of HR programs difficult to objectivelySoft” benefits of HR programs difficult to objectively
quantifyquantify
• Availability of OutsourcingAvailability of Outsourcing
– Given availability of cost-effective outsourcing,Given availability of cost-effective outsourcing,
investments in HR should produceinvestments in HR should produce highest returnshighest returns &&
sustainable competitive advantagessustainable competitive advantages..
• Utilitarian (“Bottom Line”) MentalityUtilitarian (“Bottom Line”) Mentality
– Attempt made to quantify employee worth throughAttempt made to quantify employee worth through
cost-benefit analysiscost-benefit analysis
– ““Soft” benefits of HR programs difficult to objectivelySoft” benefits of HR programs difficult to objectively
quantifyquantify
• Availability of OutsourcingAvailability of Outsourcing
– Given availability of cost-effective outsourcing,Given availability of cost-effective outsourcing,
investments in HR should produceinvestments in HR should produce highest returnshighest returns &&
sustainable competitive advantagessustainable competitive advantages..

15. Copyright © 2005 South-
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Reading 1.1: The Hidden Leverage of Human Capital (Oxman)Reading 1.1: The Hidden Leverage of Human Capital (Oxman)
Model for Management SuccessModel for Management Success
Reading 1.1: The Hidden Leverage of Human Capital (Oxman)Reading 1.1: The Hidden Leverage of Human Capital (Oxman)
Model for Management SuccessModel for Management Success
• Strengthen keyStrengthen key
relationshipsrelationships
– CustomersCustomers
– EmployeesEmployees
– ShareholdersShareholders
• Strengthen keyStrengthen key
relationshipsrelationships
– CustomersCustomers
– EmployeesEmployees
– ShareholdersShareholders
• LeverageLeverage
downtimedowntime
– Use variable-payUse variable-pay
– Address neglectedAddress neglected
areas:areas:
• InfrastructureInfrastructure
• MarketingMarketing
• OperationsOperations
• LeverageLeverage
downtimedowntime
– Use variable-payUse variable-pay
– Address neglectedAddress neglected
areas:areas:
• InfrastructureInfrastructure
• MarketingMarketing
• OperationsOperations

16. Copyright © 2005 South-
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Reading 1.1Reading 1.1
Model for Management SuccessModel for Management Success
Reading 1.1Reading 1.1
Model for Management SuccessModel for Management Success
• Refocusing staff onRefocusing staff on
what’s importantwhat’s important
– PerformancePerformance
management asmanagement as
disciplined, strategic,disciplined, strategic,
value-added processvalue-added process
– Clearly define,Clearly define,
differentiate & balancedifferentiate & balance
between corebetween core
competencies & resultscompetencies & results
• Refocusing staff onRefocusing staff on
what’s importantwhat’s important
– PerformancePerformance
management asmanagement as
disciplined, strategic,disciplined, strategic,
value-added processvalue-added process
– Clearly define,Clearly define,
differentiate & balancedifferentiate & balance
between corebetween core
competencies & resultscompetencies & results
• Building return onBuilding return on
compensationcompensation
– Link base-payLink base-pay
progression toprogression to
competencycompetency
achievementachievement
– Link incentive pay toLink incentive pay to
annual, semiannual, orannual, semiannual, or
quarterly resultsquarterly results
• Building return onBuilding return on
compensationcompensation
– Link base-payLink base-pay
progression toprogression to
competencycompetency
achievementachievement
– Link incentive pay toLink incentive pay to
annual, semiannual, orannual, semiannual, or
quarterly resultsquarterly results

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Reading 1.2 (Rynes et al.)Reading 1.2 (Rynes et al.)
Seven Common MisconceptionsSeven Common Misconceptions
Reading 1.2 (Rynes et al.)Reading 1.2 (Rynes et al.)
Seven Common MisconceptionsSeven Common Misconceptions
1.1. Conscientiousness is a better predictor ofConscientiousness is a better predictor of
performance than intelligence.performance than intelligence.
2.2. Companies that screen job applicants for valuesCompanies that screen job applicants for values
have higher performance than those that screenhave higher performance than those that screen
for intelligence.for intelligence.
3.3. Integrity tests don’t work well in practiceIntegrity tests don’t work well in practice
because so many people lie on them.because so many people lie on them.
4.4. Integrity tests have adverse impact on racialIntegrity tests have adverse impact on racial
minorities.minorities.
1.1. Conscientiousness is a better predictor ofConscientiousness is a better predictor of
performance than intelligence.performance than intelligence.
2.2. Companies that screen job applicants for valuesCompanies that screen job applicants for values
have higher performance than those that screenhave higher performance than those that screen
for intelligence.for intelligence.
3.3. Integrity tests don’t work well in practiceIntegrity tests don’t work well in practice
because so many people lie on them.because so many people lie on them.
4.4. Integrity tests have adverse impact on racialIntegrity tests have adverse impact on racial
minorities.minorities.

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Reading 1.2Reading 1.2
Seven Common MisconceptionsSeven Common Misconceptions
Reading 1.2Reading 1.2
Seven Common MisconceptionsSeven Common Misconceptions
5.5. Encouraging employee participation is moreEncouraging employee participation is more
effective for improving organizationaleffective for improving organizational
performance than setting performance goals.performance than setting performance goals.
6.6. Most errors in performance appraisal can beMost errors in performance appraisal can be
eliminated by providing training to managers oneliminated by providing training to managers on
how to avoid them.how to avoid them.
7.7. If employees are asked how important pay is toIf employees are asked how important pay is to
them, they are likely to overestimate its truethem, they are likely to overestimate its true
importance.importance.
5.5. Encouraging employee participation is moreEncouraging employee participation is more
effective for improving organizationaleffective for improving organizational
performance than setting performance goals.performance than setting performance goals.
6.6. Most errors in performance appraisal can beMost errors in performance appraisal can be
eliminated by providing training to managers oneliminated by providing training to managers on
how to avoid them.how to avoid them.
7.7. If employees are asked how important pay is toIf employees are asked how important pay is to
them, they are likely to overestimate its truethem, they are likely to overestimate its true
importance.importance.

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Reading 1.2Reading 1.2
Seven Common Misconceptions: ImplicationsSeven Common Misconceptions: Implications
Reading 1.2Reading 1.2
Seven Common Misconceptions: ImplicationsSeven Common Misconceptions: Implications
1.1. Select new employees on both intelligence andSelect new employees on both intelligence and
conscientiousness.conscientiousness.
2.2. Assess intelligence and conscientiousness beforeAssess intelligence and conscientiousness before
values.values.
3.3. Define the values that are important and assessDefine the values that are important and assess
them through carefully developed, validthem through carefully developed, valid
procedures.procedures.
4.4. Use integrity tests with ability tests for highUse integrity tests with ability tests for high
predictability.predictability.
1.1. Select new employees on both intelligence andSelect new employees on both intelligence and
conscientiousness.conscientiousness.
2.2. Assess intelligence and conscientiousness beforeAssess intelligence and conscientiousness before
values.values.
3.3. Define the values that are important and assessDefine the values that are important and assess
them through carefully developed, validthem through carefully developed, valid
procedures.procedures.
4.4. Use integrity tests with ability tests for highUse integrity tests with ability tests for high
predictability.predictability.

20. Copyright © 2005 South-
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Reading 1.2Reading 1.2
Seven Common Misconceptions: ImplicationsSeven Common Misconceptions: Implications
Reading 1.2Reading 1.2
Seven Common Misconceptions: ImplicationsSeven Common Misconceptions: Implications
5.5. Develop compelling goals; enlist participationDevelop compelling goals; enlist participation
and support it through rewards.and support it through rewards.
6.6. Training and feedback are important, but errorsTraining and feedback are important, but errors
are difficult to eliminate. Top managers shouldare difficult to eliminate. Top managers should
serve as role models in quality of performanceserve as role models in quality of performance
reviews.reviews.
7.7. Attitude surveys are subject to biases; studyAttitude surveys are subject to biases; study
behaviors as well as attitudes.behaviors as well as attitudes.
5.5. Develop compelling goals; enlist participationDevelop compelling goals; enlist participation
and support it through rewards.and support it through rewards.
6.6. Training and feedback are important, but errorsTraining and feedback are important, but errors
are difficult to eliminate. Top managers shouldare difficult to eliminate. Top managers should
serve as role models in quality of performanceserve as role models in quality of performance
reviews.reviews.
7.7. Attitude surveys are subject to biases; studyAttitude surveys are subject to biases; study
behaviors as well as attitudes.behaviors as well as attitudes.

21. Copyright © 2005 South-
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Reading 1.3 (Pfeffer)Reading 1.3 (Pfeffer)
Effective HRM PracticesEffective HRM Practices
Reading 1.3 (Pfeffer)Reading 1.3 (Pfeffer)
Effective HRM PracticesEffective HRM Practices
• Employment SecurityEmployment Security
• Selectivity in RecruitingSelectivity in Recruiting
• High WagesHigh Wages
• Incentive payIncentive pay
• Employee OwnershipEmployee Ownership
• Information SharingInformation Sharing
• Participation &Participation &
OwnershipOwnership
• Self-Managed TeamsSelf-Managed Teams
• Employment SecurityEmployment Security
• Selectivity in RecruitingSelectivity in Recruiting
• High WagesHigh Wages
• Incentive payIncentive pay
• Employee OwnershipEmployee Ownership
• Information SharingInformation Sharing
• Participation &Participation &
OwnershipOwnership
• Self-Managed TeamsSelf-Managed Teams
• Training & DevelopmentTraining & Development
• Cross-Utilization &Cross-Utilization &
Cross-TrainingCross-Training
• Symbolic EgalitarianismSymbolic Egalitarianism
• Wage CompressionWage Compression
• Promotion From WithinPromotion From Within
• Taking the Long ViewTaking the Long View
• Measurement of PracticeMeasurement of Practice
• Overall PhilosophyOverall Philosophy
• Training & DevelopmentTraining & Development
• Cross-Utilization &Cross-Utilization &
Cross-TrainingCross-Training
• Symbolic EgalitarianismSymbolic Egalitarianism
• Wage CompressionWage Compression
• Promotion From WithinPromotion From Within
• Taking the Long ViewTaking the Long View
• Measurement of PracticeMeasurement of Practice
• Overall PhilosophyOverall Philosophy

22. Copyright © 2005 South-
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Reading 1.3Reading 1.3
Effective HRM PracticesEffective HRM Practices
Reading 1.3Reading 1.3
Effective HRM PracticesEffective HRM Practices
• Very few firms will engage in all practicesVery few firms will engage in all practices
• While these practices are important forWhile these practices are important for
success, there are other determinants assuccess, there are other determinants as
wellwell
• Downsides existDownsides exist
– Requires more involvement and responsibility thanRequires more involvement and responsibility than
some employees wantsome employees want
– Managers & others may resist them as wellManagers & others may resist them as well
– Turnover may resultTurnover may result
• Very few firms will engage in all practicesVery few firms will engage in all practices
• While these practices are important forWhile these practices are important for
success, there are other determinants assuccess, there are other determinants as
wellwell
• Downsides existDownsides exist
– Requires more involvement and responsibility thanRequires more involvement and responsibility than
some employees wantsome employees want
– Managers & others may resist them as wellManagers & others may resist them as well
– Turnover may resultTurnover may result