Academic journal article Journal of Small Business Management

The Impact of Human Resource Practices and Compensation Design on Performance: An Analysis of Family-Owned SMEs

Academic journal article Journal of Small Business Management

The Impact of Human Resource Practices and Compensation Design on Performance: An Analysis of Family-Owned SMEs

Article excerpt

A sample of 168 family-owned fast growth small and medium enterprises (SMEs) was used to empirically examine the consequences of five human resource practices on sales growth performance. The results suggest that training and development, recruitment package, maintaining morale, use of performance appraisals, and competitive compensation were more important for high sales-growth performing firms than for low sales-growth performing firms. In addition, we examined the use of incentive compensation in the form of cash, noncash, and benefits and perks for four different levels of employees in family-owned SMEs. The findings suggest that high sales-growth performing firms used more cash incentive compensation at every level in the organization.

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Small and medium enterprises (SMEs), the majority of which are family-owned, play an important economic and societal role in the United States (Shanker and Astrachan 1996). Family-owned businesses account for 60 percent of total U.S. employment, 78 percent of all new jobs, more than 50 percent of gross domestic product, and about 65 percent of all wages paid (Family Firm Institute 2002). When asked about the principal challenges facing them as they grow their firms, family and nonfamily SMEs alike, point to human resource concerns (Hoover and Hoover 1999; Deshpande and Golhar 1994) While both groups identify labor shortages a primary concern, family-owned SMEs state that attracting and retaining strong nonfamily executives and dealing with insufficient or poorly trained human capital are significant barriers to business success and growth. Despite the importance of family-owned SMEs to our economy and to job growth, there is little empirical research to assist managers and CEOs facing some rather daunting human resource challenges (Heneman, Tansky, and Camp 2000; Upton and Heck 1997). Instead, much of the work done with regard to human resource management (HRM) practices and performance focuses on large organizations and not on the SMEs that are so prevalent in the marketplace today. Literature on the relationship between human resource practices and performance in small, family-owned businesses is virtually nonexistent (Upton and Heck 1997). There is considerable need then, for empirical, comparative examination of the relationships between determinants of performance, such as human resource practices, and ownership structure (Westhead and Cowling 1998). Further, Sharma, Chrisman, and Chua (1997, p. 18) suggest, "... determinants of performance hold the most promise for contributing to the advancement of the [family business] field."

This research responds to the need for empirical, comparative analysis of the factors effecting family-owned SME performance. We compare HRM practices within a sample of high and low performing family-owned SMEs split based on sales growth. We examine the effects on performance by primary HRM practices, such as recruitment package, performance appraisal, compensation and benefits, maintaining morale, and training and development. First, differences in importance placed on each of these human resource areas are explored and then their relationship to performance is determined. Finally, differences in the use of various forms of compensation (that is, cash incentives, noncash incentives, and benefits and perks) across four different organizational levels (CEO to total employees) and their effect on performance are explored.

We begin by providing an overview of HRM practices and their link to organizational performance. Next, the importance of the HRM issues and compensation design is discussed. Although very little research examines HRM practices at family-controlled SMEs, the extant literature is reviewed and hypotheses are put forward. We then empirically examine differences in HRM practices for high and low performing family-owned SMEs. Next, we look at the design of incentive compensation systems across high and low performing family-owned SMEs. …

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