HUMAN RESOURCE MANAGEMENT, EMPLOYEE EXCHANGE RELATIONSHIPS, AND PERFORMANCE IN SMALL BUSINESSES

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1 HUMAN RESOURCE MANAGEMENT, EMPLOYEE EXCHANGE RELATIONSHIPS, AND PERFORMANCE IN SMALL BUSINESSES MATHEW R. ALLEN, JEFF ERICKSEN, AND CHRISTOPHER J. COLLINS In this study, the authors examine the effects of commitment-based human resource management practices on the performance of small businesses. These effects are examined through the mediators of employee involvement and quit rates. In addition, they contribute to arguments that the effect of human resource management practices on performance takes place through the establishment and support of exchange relationships with employees. Using responses from CEOs and employees of small businesses, their results indicate that human resource practices in small businesses that are based on leaders views of employee commitment are positively related to revenue growth and perceptions of performance. Further, the authors found that employee involvement and quit rates mediate these relationships. Keywords: strategic HR, entrepreneurial/small business Over the last two decades, there has been increasing interest in understanding the relationship between systems of human resource practices and firm performance (Wright, Gardner, Moynihan, & Allen, 2005). Strategic human resource management (SHRM) researchers have argued that systems of HR practices can enhance the ability and motivation of an organization s human capital and thereby increase firm performance and the potential for a competitive advantage (Barney & Wright, 1998; Wright, Dunford, & Snell, 2001; Wright, McMahan, & McWilliams, 1994). However, while a large and growing number of studies have found that systems of HR practices are positively correlated with firm performance in larger organizations (Subramony, 2009; Wright et al., 2005), considerably less SHRM research has focused on small businesses (Barber, Wesson, Roberson, & Taylor, 1999). This is somewhat surprising given that small businesses currently account for one half of all private-sector jobs and historically have Correspondence to: Mathew R. Allen, Entrepreneurship Division, Babson College, Blank 105, Babson Park, MA 02457, Phone: , mallen4@babson.edu. Human Resource Management, March April 2013, Vol. 52, No. 2. Pp Wiley Periodicals, Inc. Published online in Wiley Online Library (wileyonlinelibrary.com). DOI: /hrm.21523

2 154 HUMAN RESOURCE MANAGEMENT, MARCH APRIL 2013 accounted for nearly 65 percent of net job creation (Headd, 2010). Given the importance of small businesses to workers and the economy, it is vital that researchers and practitioners better understand how HR practices affect small-business performance. One system of HR practices that has consistently been found to be positively related to firm performance is a set of highcommitment HR practices (McClean & Collins, 2011). High-commitment HR practices generally include high pay contingent on performance, greater autonomy and the use of teams, enhanced opportunities for training and development, and selective staffing focused on organizational fit (Batt, 2002; Collins & Smith, 2006; McClean & Collins, In the present study, 2011). Further, the use of highcommitment HR practices has we draw on social been shown to increase employee effort (McClean & Collins, exchange theory 2011), promote employee knowledge combination and exchange and the relational (Collins & Smith, 2006), enhance perspective to management-union initiatives (Geare, identify and test the Edgar, & McAndrew, 2009), reduce employee quit rates (Batt, 2002; mediating effects Batt & Colvin, 2011), and increase sales growth (Batt, 2002). of two indicators Despite continued progress, the field of SHRM faces a number of critical challenges. First, as of the quality of the employment Kehoe and Collins (2008) argued, researchers need to more carefully match their conceptualiza- exchange: employee tions and measures of HR practices involvement and quit to particular strategic contexts. rates. For example, the vast majority of SHRM research has examined the effects of HR practices on firm performance in larger organizations (Way, 2002). Yet it is not clear whether these findings translate to small businesses, which often lack the resources and technical knowledge necessary to implement comprehensive HR systems (Barber et al., 1999; Sels et al., 2006). In the present study, we draw on the notion of employment models or blueprints (Albert & Whetten, 1985) to explain how small business leaders conceptualizations of the employment exchange lead to the use of particular commitment-based HR practices. Thus, our first contribution is to theoretically develop and test a context-specific framework linking commitment-based HR practices to smallbusiness performance. Second, researchers have called for greater understanding of mediating mechanisms through which HR systems impact firm performance (Becker & Huselid, 2006; Paauwe & Boselie, 2005; Wright et al., 2001). SHRM scholars have regularly used social exchange theory and relational perspectives (Blau, 1964; Cropanzano & Mitchell, 2005) to explain how HR systems engender strategically important employee behaviors (Collins & Smith, 2006; Redman & Snape, 2005; Sun, Aryee, & Law, 2007). According to this line of reasoning, firms that implement a set of commitment-based HR practices create positive exchange relationships that encourage employees to reciprocate by using their enhanced ability and motivation in the pursuit of firm goals. In the present study, we draw on social exchange theory and the relational perspective to identify and test the mediating effects of two indicators of the quality of the employment exchange: employee involvement and quit rates. Thus, our second contribution is to theoretically develop and test the mediating effects of employee involvement and quit rates on the relationship between commitment-based HR practices and small-business performance. We pursue our intended contributions as follows. First, we briefly review the literature on employment models to explain how commitment-based HR practices relate to the small-business context. Next, we leverage social exchange theory and the relational perspective to develop a theoretical model that (1) describes the components of this commitment-based HR system and (2) predicts that commitment-based HR practices positively impact the performance of small businesses by increasing employee involvement and reducing employee quit rates (see Figure 1). Finally, we test our model using data from surveys of CEOs and employees from a sample of small businesses collected

3 HRM, EMPLOYEE EXCHANGE RELATIONSHIPS, AND PERFORMANCE IN SMALL BUSINESSES 155 Commitment-Based HR Practices Attachment based on relationships and company identification Coordination based on autonomy and informal control Selection based on values and cultural fit FIGURE 1. Proposed Framework Involvement Quit Rates Firm Performance Revenue growth Relative performance over a three-year period of time, and discuss the implications of our findings for research and practitioners. Theory Development and Hypotheses Small Businesses and SHRM While a large body of research has addressed the relationship between high-commitment HR systems and firm performance in larger organizations (Subramony, 2009), much less is known about the extent to which these systems affect small-business performance (Cardon & Stevens, 2004; Way, 2002). Because small businesses often face threats due to a lack of legitimacy and available resources (Stinchcombe, 1965), the effective management of human resources may be an important predictor of organizational success and survival (Patel & Cardon, 2010). However, researchers who have examined HR practices in small businesses regularly find that small businesses lack sophisticated HR practices and rarely have HR professionals on staff (Barber et al., 1999; Heneman, Tansky, & Camp, 2000). Instead, the design and implementation of HR systems is typically left to organizational leaders such as CEOs, founders, and owners (Barber et al., 1999). Accordingly, small businesses are less likely than larger organizations to design and implement HR practices that typically comprise a highcommitment HR system (Klaas, McClendon, & Gainey, 2000; Patel & Cardon, 2010; Way, 2002). Because HR systems in small businesses are closely tied to firm leaders views of the employment relationship, it is important to identify a set of practices that both create an atmosphere of high commitment and fit leaders implicit models of the employment exchange. Therefore, we use J. N. Baron and colleagues typology of employment blueprints to identify a set of commitment-based HR practices relevant to small businesses (J. N. Baron, Hannan, & Burton, 2001; Hannan, Burton, & Baron, 1996). CEO Employment Models and Commitment-Based HR Practices The idea of employment models is rooted in the concept of organizational identity (Albert & Whetten, 1985; Gioia, Price, Hamilton, & Thomas, 2010), which has been defined as the expression of the core values, beliefs, or ideals held by the organization (Gioia et al., 2010). Organizational identity is often a reflection of the leader or founder of the organization (Scott & Lane, 2000; Stinchcombe, 1965) and influences the nature of the relationships that an organization develops with key stakeholders, such as customers and employees (J. N. Baron et al., 2001). In small firms, CEOs play an especially important role in delineating and translating core values into organizational processes and decision making (Gioia et al., 2010; Scott & Lane, 2000). The influence that small-business leaders have in shaping identity-laden organizational practices has important implications for human resource management. For example,

4 156 HUMAN RESOURCE MANAGEMENT, MARCH APRIL 2013 J. N. Baron and colleagues Stanford Project on Emerging Companies (SPEC) used extensive interviews with the founders and CEOs of small entrepreneurial firms to show that organizational leaders form models or blueprints of the employment exchange that vary across three dimensions: (1) the basis for attachment, (2) the basis of coordination and control, and (3) employee selection (J. N. Baron, Hannan, & Burton, 1999; J. N. Baron et al., 2001; Hannan et al., 1996). In addition, the SPEC found that leader responses to the three dimensions clustered into five basic employment system blueprints, one of which was a commitment employment model (J. N. Baron & Hannan, 2002). According to the SPEC, firms that held a commitment Commitmentbased HR systems employment blueprint pursued (1) attachment based on relationships and company identification, (2) coordination-based lead to higher autonomy and informal control, firm performance and (3) selection based on values and cultural fit (J. N. Baron by creating et al., 2001; Burton & Beckman, 2007; Hannan et al., 1996). and supporting These three dimensions of a positive exchange commitment-based employment blueprint represent high-level relationships principles that small business leaders use to guide the design between employees and implementation of organizational practices. For example, and their employers. compared to other blueprints, firms that held a commitment model reported significantly less administrative overhead (in terms of managerial intensity), presumably because leaders appear to have directed whether administrative duties were to be the responsibility of self-managing individuals... versus the province of specialists (J. N. Baron & Hannan, 2002, p. 21). Furthermore, firms with a commitment blueprint were less likely to change their employment model, and thus, to experience the performance-reducing effects of increased employee turnover (J. N. Baron et al., 2001). In addition, firms that followed a commitment model achieved superior performance in that they were the fastest to go public and the least likely to fail (J. N. Baron & Hannan, 2002). Therefore, one potentially fruitful way to examine how HR practices influence employee organization exchanges and small businesses performance is to focus on a set of commitment-based HR practices rooted in the commitment employment blueprint. We explain next how the use of HR practices consistent with a commitment-based employment model is likely to foster smallbusiness performance. Additionally, we suggest that the positive effect of commitmentbased HR practices on small-business performance is mediated by two indicators of the quality of the employment exchange: (1) employee involvement and (2) quit rates. Commitment-Based HR Practices and Small-Business Performance In general, organizations depend on employees to achieve their goals because employee knowledge and behaviors are the most essential inputs to a multitude of processes (e.g., sales, customer service, quality control) that drive the performance of any organization (Becker & Huselid, 2006). However, employees have discretion as to the extent to which they carry out those processes, support their colleagues, contribute additional effort, or contribute their knowledge. Thus, more effective implementation of HR practices enables the company to encourage these needed contributions from employees (Collins & Smith, 2006). This may be particularly important for small businesses because these organizations may require employees to be more adaptive and take on broader role assignments in order to effectively carry out alternative strategies such as speed to market, creativity, and flexibility (Mintzberg, 1979). Commitment-based HR systems lead to higher firm performance by creating and supporting positive exchange relationships between employees and their employers (McClean & Collins, 2011; Tsui, Pearce, Porter, & Tripoli, 1997). According to social exchange theory, employees engage in behaviors that are beneficial to the organization as part of an exchange relationship

5 HRM, EMPLOYEE EXCHANGE RELATIONSHIPS, AND PERFORMANCE IN SMALL BUSINESSES 157 with their employer in which employees exchange their positive attitudes and efforts for remuneration from the employer (Blau, 1964). Accordingly, the use of commitmentbased HR practices in small businesses represents a willingness on the part of the employer to support positive employee behaviors (Gould-Williams, 2007). As a result, employees are more willing to enter into these exchange relationships and, in turn, to offer up their abilities and efforts in support of the organization (Tsui, Pearce, Porter, & Hite, 1995; Tsui et al., 1997). From an employment model perspective, attachment is what binds an employee to the firm (J. N. Baron et al., 2001). Attachment based on relationships refers to the creation of a strong family feel that is based on emotional bonds between employees and the organization. These feelings of belonging create a sense of personal identification with and attachment to the organization, increasing a willingness to contribute skills and effort on behalf of the organization (J. N. Baron et al., 2001; Burton & Beckman, 2007). By providing opportunities to engage with and become attached to the organization on a social and emotional level, employees are made to feel like they have an emotional bond with the organization and are a part of a family rather than just a job (J. N. Baron et al., 2001). In turn, when employees develop this emotional bond and attachment to the organization, they are likely to internalize key organizational goals and motives as their own and, as a result, are more willing to support the accomplishment of those goals with their own effort (Baard, Deci, & Ryan, 2004). Fit with an organization s culture or values, from the standpoint of CEO-based organization models, refers to a desire on the part of the leader to staff the organization based primarily on a fit with the culture of the organization (J. N. Baron et al., 2001). Small businesses can increase feelings of congruence with organization norms and values through the use of employee selection practices that are focused on hiring for fit with organizational values and culture (Collins & Smith, 2006; Judge & Cable, 1997). As with higher attachment, increased fit and the congruence of firm and employee values will enhance the establishment of exchange relationships and the willingness of employees to share their capabilities, thus increasing performance (Tsui et al., 1997). As organizations hire employees based on their fit with the values and norms of the organization, employees experience greater congruence between their own values and those expressed by the organization, resulting in increased willingness to engage with the organization (Baard et al., 2004; Gottschalg & Zollo, 2007). In this case, employees feel that the work environment is supportive of their own goals and needs, creating psychological relationships whereby employees are willing to exchange positive behaviors for the opportunity to work in this value-supportive environment, further increasing performance. Finally, an informal culture of control refers to a desire by the CEO to provide employees with an environment where they can make their own decisions without direct oversight from leaders or management (J. N. Baron et al., 2001). As employees possess more freedom to determine how their work will be completed, their desire to engage with the organization through contributing their skills and effort is increased (Batt, 2002). This occurs as employees are able to choose how they will use their skills and abilities and make their own decisions, which has been shown to lead to increased motivation and effort (Deci, Connell, & Ryan, 1989). Small businesses can support a desire to control employees through informal means through the adoption of HR practices that increase discretion in the job, such as reduced oversight from superiors and the ability to monitor their own performance (Hackman & Oldham, 1976). This, in turn, will also support the establishment of exchange relationships and the contribution of abilities and effort on behalf of the organization, further increasing performance (Song, Tsui, & Law, 2009; Tsui et al., 1997). This increased effort on the part of the employees will lead to higher levels of performance. Based on these arguments, a system of HR practices following a commitment model

6 158 HUMAN RESOURCE MANAGEMENT, MARCH APRIL 2013 will increase the willingness of employees to engage with the organization through the establishment of exchange relationships. When organizations create this positive exchange relationship, employees will be more willing to contribute their skills and effort on behalf of the organization as part of this exchange relationship, leading them to exert higher levels of effort in support of the goals and strategies of the organization (McClean & Collins, 2011). Higher employee motivation to live up to their end of the exchange relationship and their increased motivation to do what is needed for the organization is likely to lead to positive outcomes in employee-influenced activities such as sales, quality control, and customer service. This will result in higher overall firm performance (Koys, 2001; Sun et al., 2007). This leads us to the following hypothesis: Hypothesis 1: A set of HR practices based on a commitment model will be significantly and positively related to firm-level performance in small businesses. Commitment Model Based HR Systems and Employee Involvement As noted, we argue that a system of HR practices based on a commitment model will enhance the establishment of exchange relationships by creating positive exchange relationships between the firm and employees that lead to higher firm performance. Underlying these relational and social exchange arguments is the notion that a system of HR practices based on a commitment model leads to higher firm performance through employee behavior resulting from this higher exchange relationship. In this study, we chose to focus on two specific aspects of employee behavior that reflect the employees commitment back to the organization: employee involvement and turnover. Employee involvement has been described as a level of engagement in one s job or the level of engagement in carrying out job tasks (Keller, 1997). While involvement can be expressed internally through general employee attitudes toward work, involvement can also be expressed by behaviors such as a willingness to stay late or take on extra responsibilities (Chen & Chiu, 2009; Keller, 1997; Lodahl & Kejner, 1965). We were particularly interested in employee involvement, as it is a positive employee behavior that is reflective of their willingness to engage with and commit extra effort on the behalf of their employer. Therefore, involvement is a good indication of employee behavioral responses to an effective exchange relationship with their employer (Batt & Colvin, 2011). The use of HR practices based on a commitment model increases employee involvement by increasing engagement with the organization and aligning the interests of the employees with those of the organization (Batt, 2002; Hackman & Oldham, 1976). As discussed previously, HR practices following a commitment model encourage the establishment of attachment based on relationships with the employee creating a family feel (J. N. Baron et al., 2001). Additionally, HR practices based on a commitment model encourage feelings of autonomy through informal controls allowing employees to choose how to complete tasks and responsibilities. This allows employees to feel as if their employment supports their own goals and desires, further increasing employee involvement (Deci et al., 1989). Finally, HR practices based on a commitment model select employees based on their fit with the values and norms represented by the organization. thus satisfying employees need to belong (Greguras & Diefendorff, 2009). In this way, employees feel that supporting the goals of the organization supports their own values. The needs of the employee and the needs of the organization are further aligned, and as a result, employee involvement is increased (Keller, 1997). This occurs as employees exchange their involvement for the motivation and fulfillment that this involvement provides (Deci, 1975). As exchange relationships are established with employees through the use of

7 HRM, EMPLOYEE EXCHANGE RELATIONSHIPS, AND PERFORMANCE IN SMALL BUSINESSES 159 HR practices based on a commitment model, employee involvement will increase. This will in turn impact firm-level performance. When employees are involved in their jobs, they choose to behave in a way that supports organization goals (Chen & Chiu, 2009; Coyle-Shapiro, Kessler, & Purcell, 2004; Keller, 1997). As employees are more engaged in their work and exert increased effort in their roles, the positive impact on employee-influenced outcomes in the organization such as quality, customer service, and productivity will increase. This will lead to higher levels of performance at the firm level. Thus, we expect that the effect that the use of HR practices based on a commitment model will have on firm-level performance will work through employee behaviors namely, increased involvement on the part of employees. Hypothesis 2: Involvement will mediate the relationship between the use of HR practices based on a commitment employment model and firm-level performance in small businesses. Commitment-Based HR Systems and Quit Rates Researchers have argued that highcommitment HR systems create environments where employees experience higher levels of attachment to the organization and work environment, resulting in lower levels of turnover (Wright et al., 2005). Indeed, there is empirical evidence of a significant relationship between the use of highcommitment HR practices and reduced levels of turnover (Batt, 2002; Batt & Colvin, 2011). It is important to note that scholars have argued that the principal issues driving turnover are the attractiveness of the current position and the availability of alternatives (Shaw, Delery, Jenkins, & Gupta, 1998). Thus, HR practices that can increase the attractiveness of the current position as well as make it more difficult to find comparable alternatives will contribute to decreased turnover. We argue that a set of HR practices based on a commitment model are likely to do both. This occurs as HR practices support the formation of exchange relationships with employees enhancing their view of their current role and reducing desires to leave the organization (Shaw, Dineen, Fang, & Vellella, 2009). The first aspect of a commitment model of HR, attachment to the organization based on relationships, increases employees feelings that they are part of a family rather than just employees (J. N. Baron et al., 2001). In this way, employees develop a special bond with the organization. This encourages the establishment of exchange relationships with the employer, but it also works to reduce desires on the part of the employee to leave the organization. Finding an alternative employer that is willing to engage with employees on a personal level could prove HR practices that difficult. Even if employees were to be able to find such a replacement for their current employ- can increase the attractiveness of ment, establishment of a similar level of a positive exchange relationship would take time. Thus, the current position HR practices that support the as well as make development of relationships with employees reduce turnover it more difficult to intentions by decreasing the find comparable likelihood of alternatives (Shaw et al., 1998). Similarly, a focus on alternatives will relationships with employees also increases the attractiveness of the contribute to current position. As HR practices decreased turnover. encourage the establishment of relationships with employees, they feel more attached to the organization because of a sense of belonging (J. N. Baron et al., 2001). In this way, employees are able to fulfill employment needs as well as social needs as part of their work, greatly increasing the attractiveness of their current position. Following on this argument, an effort to promote attachment based on relationships further reduces turnover intentions (Shaw et al., 1998). A second aspect of HR practices based on a commitment model, informal controls, encourages feelings of autonomy by creating work conditions that allow employees to choose how to complete tasks and

8 160 HUMAN RESOURCE MANAGEMENT, MARCH APRIL 2013 responsibilities (Deci et al., 1989). Informal controls through autonomy have been shown to increase job satisfaction, which has a negative effect on turnover (Deci et al., 1989; Shaw et al., 1998). In addition, more freedom in work design has been shown to reduce emotional exhaustion and job-related stress, both of which are positively related to turnover (Richer, Blanchard, & Vallerand, 2002). Thus, as employees feel that they have control over their own destiny in relation to their work As HR practices environment, they will be less likely to seek alternative employment arrangements or find alter- based on a commitment natives that are able to provide similar levels of discretion, further reducing turnover (Gagné & model or blueprint Deci, 2005). of the CEO are A third aspect of an HR system implemented, the based on a commitment model, selecting employees into the organization based on how well they attractiveness of fit with the values and norms the current position espoused by the organization, is increased and may also work to decrease turnover. This fit between employees the perceived and employers on norms and values reduces feelings of dissonance availability of and satisfies employees psychological needs to belong (Greguras alternative & Diefendorff, 2009). In this way, employment HR practices based on a commitment model align the needs of opportunities is employees and the organization, increasing the attractiveness of decreased. their current role (Gottschalg & Zollo, 2007). Further, employees may be less inclined to leave an organization where they feel a high degree of fit because they may perceive that it is unlikely that they could find an alternative employer that similarly fits with their personal values, making other employment opportunities less appealing (Shaw et al., 1998). As HR practices based on a commitment model or blueprint of the CEO are implemented, the attractiveness of the current position is increased and the perceived availability of alternative employment opportunities is decreased. This reduces desires on the part of employees to leave the organization. As turnover is reduced through the use of commitment-based HR practices, employee tenure on the job will increase, allowing employees more time to gain the knowledge and skills necessary to more effectively perform their tasks (Batt, 2002). Furthermore, lower levels of turnover will allow the organization to focus on the business rather than wasting time searching for, orienting, and training new employees (Guthrie, 2001). This increased learning and effectiveness on the job combined with the time and resources to focus on strategic initiatives instead of hiring to combat turnover will lead to higher levels of performance. Thus, the effect of commitment-based HR practices should take place through reduced turnover. Hypothesis 3: Quit rates will mediate the relationship between the use of HR practices based on a commitment employment model and firm-level performance in small businesses. Methodology Overview of the Research Process To test our hypotheses, we gathered information from small companies, defined as for-profit organizations with fewer than 200 employees. Data were collected from two sources at three points in time. First, company CEOs (owners, presidents) provided information about high-commitment HR practices and quit rates. Then, four months after the initial survey, front-line workers provided assessments of involvement. Finally, two years after the initial survey, company CEOs provided ratings of firm performance. Given the multiple sources of data, we were able to test our hypotheses in several ways described here. Sample The sample consisted of clients of a publicly traded HR outsourcing firm that provides HR

9 HRM, EMPLOYEE EXCHANGE RELATIONSHIPS, AND PERFORMANCE IN SMALL BUSINESSES 161 services to small businesses (e.g., payroll management systems and insurance pooling). The researchers were entirely responsible for designing and conducting the study. We selected firms from the HR outsourcing firm s database with the criterion that they employ a maximum of 200 employees. Surveys were then mailed to the CEOs of 2,250 firms in the summer of 2004, and we received complete information from 270 firms for an initial response rate of 12 percent. This response rate is low; however, previous research has shown that smaller firms are less likely than larger firms to participate in survey research, and our response rate is not unexpected in this context (Bartholomew & Smith, 2006; Newby, Watson, & Woodliff, 2003). Participating firms did not differ significantly from non-participating firms on the two pieces of information we had for each firm: size (number of employees) and location (home state). On the final page of the survey, CEOs were invited to participate in an optional additional phase of the study by providing the names and contact information for up to 15 front-line employees. In total, 110 firms agreed and provided information for 688 employees. To ensure anonymity, employees were instructed to return the involvement questionnaires directly to the research team or to complete the survey online. We distributed the surveys in the fall of 2004 and received complete information from 272 employees representing 81 firms, for an employee response rate of 40 percent and a firm participation rate of 74 percent. On average, we received 4.36 employee survey responses from each participating firm for an overall workforce participation rate of percent. Participating firms did not differ significantly from non-participating firms on any of the variables we studied: industry, age, size, commitment-based HR practices, revenue growth, and relative performance. Finally, in the fall of 2007, we interviewed the CEOs of the 270 firms that completed the initial survey and obtained lagged firm-performance information for 215 firms for a follow-up response rate of 80 percent. Within this larger sample, we received firm performance data from 67 of the 81 firms that provided employee involvement information for a survey participation rate of 83 percent and an overall firm participation rate of around 3 percent (67/2,250). Therefore, we tested our full model, using a sample of 67 firms. However, because the necessary data were available, we also conducted omnibus tests of Hypotheses 1 and 3 using the larger sample of 215 firms. The overall participation rate of firms in this larger sample was roughly 10 percent (215/2,250). Firms that provided firm-performance data did not differ from non-participating firms on any study variables. Overall, the firms represented five industries: 28 percent provided basic services (e.g., auto repair, commercial cleaning), 22 percent provided professional services (e.g., law firms, software development firms), 19 percent were in retail, 20 percent were in construction, and 11 percent were in manufacturing. The mean firm size was 27.4 employees, the mean firm age was 20.0 years, and the mean CEO tenure was 12.5 years, suggesting that the firms were both small and well established. Measures Commitment-Based HR Practices We created a conceptually driven additive index of commitment-based HR practices. An additive index is composed of substitutable components whose elements are not caused by an underlying construct but, when summed, yield a value whose magnitude is relevant to the construct (Trevor & Nyberg, 2008, p. 265). Additive indexes are regularly used in strategic HR research to create a single measure from a series of underlying dimensions (Batt, 2002; Shaw, Gupta, & Delery, 2005; Trevor & Nyberg, 2008). Overall, we used a nine-item index that included three items for each of the three proposed dimensions: (1) attachment based on relationships and company identification, (2) coordination based on autonomy and informal control, and (3) selection based on values and cultural fit.

10 162 HUMAN RESOURCE MANAGEMENT, MARCH APRIL 2013 Specifically, the CEO at each participating company was asked to rate the extent to which he or she agreed (1 = strongly disagree, 5 = strongly agree ) that the company used the various HR practices to manage company employees. The nine-item index measure is presented in the Appendix. Following Hinkin (1998), we examined several statistical properties of our measure. First, we conducted exploratory factor analyses (EFAs) with Varimax rotation to examine how well the data fit the proposed threefactor structure. Results can be obtained from the first author. Using both the smaller (N = 67) and larger (N = 215) samples, we found that the three items for selection strongly loaded onto We calculated a single factor, the three items for coordination strongly loaded commitment-based onto a single factor, and the three HR practices as the items for attachment strongly loaded onto a single factor. None average of the three of the items produced significant off-loadings. Together, the first-order dimension three factors explained 61 and 59 scores. A high percent of the total item variation, respectively. score on this index Next, we conducted confirmatory factor analyses (CFAs). measure indicates Specifically, the three items referencing selection were loaded greater use of onto a single factor, the three commitment-based items capturing coordination were loaded onto a single factor, HR practices to and the three items representing manage employees. attachment were loaded onto a single factor. Results using the smaller sample indicated good fit (χ 2 /df = 1.15, CFI =.96, RMSEA =.05) and chi-square difference tests indicated that the proposed three-factor model fit the data significantly better than did a one-factor model ( χ 2 = 32.39, p <.05, CFI =.61, RMSEA (3) =.14). Results using the larger sample also indicated good fit (χ 2 /df = 1.98, CFI =.92, RMSEA =.07) and chi-square difference tests again provided strong support for the proposed three-factor model ( χ 2 = , p (3) <.01, CFI =.54, RMSEA =.15). Finally, we examined the interrater reliability and validity. First, we compared CEO assessments of commitment-based HR practices to aggregated employee ratings of the same measure and found that the correlation was positive and significant (r =.40, p <.01). Then, we merged the CEO and employee responses and calculated interrater reliability statistics. Results indicated that firm membership explained a significant proportion of the variance in our measure of commitment-based HR practices (F = 3.28, p <.01). The ICC(1) was.35, the ICC(2) was.70, and the mean r WG was.94. These values were well within the recommended range (Bliese, 2000). Therefore, we concluded that CEO responses adequately represented firmlevel use of commitment-based HR practices. We calculated commitment-based HR practices as the average of the three firstorder dimension scores. A high score on this index measure indicates greater use of commitment-based HR practices to manage employees. Quit Rates Information about quit rates was collected by asking CEOs, How many employees quit your firm in the last year? To standardize these figures, we divided the absolute number of quits by the number of firm employees at the time of the initial CEO survey and then multiplied by 100 (Batt, 2002; Glebbeek & Bax, 2004; Shaw et al., 2005). In our study, quit rates were not normally distributed (skewness = 3.68, kurtosis = 16.05), so we transformed our measure by adding one and computing the natural logarithm. Involvement We measured involvement using employees responses to a five-item scale adapted from Lodahl and Kejner (1965) by including those items that represented observable outcomes and could thus be adapted for firm-level analysis. Specifically, we asked employee respondents to assess the extent to which they agreed with the following items (1 = strongly disagree, 5 = strongly agree ): Our employees live, eat, and breathe their jobs, Employees at this company will stay overtime to

11 HRM, EMPLOYEE EXCHANGE RELATIONSHIPS, AND PERFORMANCE IN SMALL BUSINESSES 163 finish a project even if they are not paid for it, Employees here work harder than people doing this type of work at other organizations, Employees avoid taking on extra duties and responsibilities at work (reversecoded), and The people at this company are very much personally involved in their work. The Cronbach s alpha for the five-item scale was.77, and the interrater reliability statistics supported aggregation (ICC[1] =.28; ICC[2] =.57; r WG =.83). Therefore, we averaged the employee responses within each firm to estimate firm-level involvement. Firm Performance To respond to calls for the use of multiple measures of performance and longitudinal research designs (Wright et al., 2005), we contacted the CEOs in the fall of 2007 and obtained two indicators of firm performance for the one-year financial period two years after the independent variables were assessed. First, revenue growth was measured by asking CEOs, By what percentage has your organization s revenues increased or decreased in the past year? Second, perceptions of performance were assessed using Delaney and Huselid s (1996) seven-item organizational performance scale. Specifically, CEOs were asked to Compare your organization s performance over the last three years to that of other organizations that do the same kinds of work on multiple dimensions using a five-point scale (1 = much worse, 5 = much better ). The Cronbach s alpha for the seven-item scale was.82, which is comparable to Delaney and Huselid s finding of.85. Controls To control for potential confounding effects, we included several control variables from the initial CEO survey: industry, age, and size. As noted earlier, each firm was coded into one of five industry categories on the basis of CEO industry identifications as well as descriptions provided by the HR outsourcing firm. Age was measured as the number of years since the organization was founded. Size denotes the natural logarithm of the number of firm employees at the time of the initial CEO survey. Results In Table I, we present the means, standard deviations, and correlations for the study variables. We used ordinary least squares regression analysis to test our hypotheses. Hypothesis 1 predicted that the use of commitment-based HR practices will be positively related to firm-level performance. Tables II and III present the results with revenue growth and perceptions of performance as the dependent variables, respectively. As Models 2 and 5 of Table II show, the use of commitment-based HR practices was positively related to revenue growth in both the smaller sample (N = 67) (B =.26, p <.05) and the larger sample (N = 215) (B =.20, p <.01). As Models 2 and 5 of Table III show, commitment-based HR practices were also positively related to perceptions of performance in the smaller (B =.41, p <.01) and larger (B =.30, p <.01) samples. Therefore, Hypothesis 1 was supported. Hypothesis 2 predicted that involvement mediates the relationship between commitment-based HR practices and firm performance. We tested for mediation using Baron and Kenny s three-step procedure (R. M. Baron & Kenny, 1986; Kenny, Kashy, & Bolger, 1998). Table IV presents the results with involvement and quit rates as the dependent variables, respectively. In support of step 1, Model 2 shows that commitmentbased HR practices were positively related to involvement (B =.30, p <.05). In support of step 2, results of Hypothesis 1 showed that commitment-based HR practices were positively related to firm performance. Finally, in step 3, we examined changes in the relationship between commitment-based HR practices (the independent variable) and performance (the dependent variable) with involvement (the mediator variable) in the regression equation. Hypothesis 2 was supported for revenue growth. As Model 3 of Table II shows, involvement was positively related to

12 164 HUMAN RESOURCE MANAGEMENT, MARCH APRIL 2013 TABLE I Means, Standard Deviations, and Correlations a M SD Professional services Retail ** 3. Construction **.24 ** 4. Manufacturing **.17 *.17 * 5. Age * Size b * Commitment-based HR ** * practices 8. Quit rates b ** ** 9. Involvement * Revenue growth **.21 **.20 **.32 ** 11. Relative performance *.30 **.19 ** ** a N = 67 for employee involvement; N = 215 for all other variables; two-tailed tests. b Natural logarithm. * p <.05. ** p <.01.

13 HRM, EMPLOYEE EXCHANGE RELATIONSHIPS, AND PERFORMANCE IN SMALL BUSINESSES 165 TABLE II Results of Regression Analyses for Revenue Growth a Variables Model 1 Model 2Model 3 Model 4 Model 5 Model 6 Professional service * Retail Construction.29 *.28 *.32 ** Manufacturing Age.31 * * Size b.37 **.39 **.39 **.26 **.26 **.27 ** Commitment-based HR practices.26 * **.16 * Quit rates b ** Involvement.25 * R 2.28 **.34 **.43 **.10 **.13 **.16 ** in R 2.28 **.06 *.09 *.10 **.04 **.03 ** N a N = 67 for employee involvement; N = 215 for all other variables; two-tailed tests. b Natural logarithm. p <.10. * p <.05. ** p <.01. TABLE III Results of Regression Analyses for Relative Performance a Variables Model 1 Model 2Model 3 Model 4 Model 5 Model 6 Professional service * Retail Construction Manufacturing *.14 Age Size b *.14 *.14 *.15 * Commitment-based HR practices.41 **.30 *.30 **.27 ** Quit rates b.35 **.14 * Involvement.03 R *.33 ** **.15 ** in R **.10 * **.02 * N a N = 67 for employee involvement; N = 215 for all other variables; two-tailed tests. b Natural logarithm. p <.10. * p <.05. ** p <.01.

14 166 HUMAN RESOURCE MANAGEMENT, MARCH APRIL 2013 TABLE IV Results of Regression Analyses for Involvement and Quit Rates a Involvement Quit Rates b Variables Model 1 Model 2Model 3 Model 4 Model 5 Model 6 Professional service **.17 * Retail Construction Manufacturing Age Size b Commitment-based HR practices.30 *.32 *.23 ** R ** in R * * ** N a N = 67 for employee involvement; N = 215 for all other variables; two-tailed tests. b Natural logarithm. p <.10. * p <.05. ** p <.01. revenue growth with commitment-based HR practices and quit rates in the equation (b =.25, p <.05). Further, the coefficient for commitment-based HR practices was no longer significant (B =.12, p = n.s.). We used Preacher and Hayes s (2008) bias corrected bootstrap test to determine whether the mediation results were statistically significant. Results supported mediation as the 95 percent confidence interval (C.I.) ranged from.42 to 7.89 (p <.05). Hypothesis 2 was not supported for perceptions of performance. As Model 3 of Table III shows, involvement was not related to perceptions of performance with commitment-based HR practices and quit rates in the equation (b =.03, p = n.s.). Therefore, Hypothesis 2 was partially supported. Hypothesis 3 predicted that quit rates will mediate the relationship between commitment-based HR practices and firm performance. In support of step 1, Models 4 and 6 of Table IV show that the use of commitment-based HR practices was negatively related to quit rates in both the smaller (B =.32, p <.05) and larger (B =.23, p <.01) samples. In support of step 2, results of Hypothesis 1 showed that commitmentbased HR practices were positively related to firm performance. Finally, in step 3 of the procedure, we examined changes in the relationship between commitment-based HR practices (the independent variable) and performance (the dependent variable) with quit rates (the mediator variable) in the regression equation. Hypothesis 3 was supported for revenue growth. As shown in Models 3 and 6 of Table II, quit rates were negatively related to revenue growth using both the smaller (B =.19, p <.10) and larger (B =.18, p <.01) samples. The coefficient for commitment-based HR practices was not significant in the smaller sample (B =.12, p = n.s.) and positive and significant in the larger sample (B =.16, p <.05). Bias-corrected bootstrap tests supported mediation using both the smaller (95 percent C.I. ranged from.04 to 7.96, p <.05) and larger (95 percent C.I. ranged from.46 to 3.07, p <.05) samples.

15 HRM, EMPLOYEE EXCHANGE RELATIONSHIPS, AND PERFORMANCE IN SMALL BUSINESSES 167 Hypothesis 3 also was supported for perceptions of performance. As shown in Models 3 and 6 of Table III, quit rates were negatively related to perceptions of performance using both the smaller (B =.35, p <.01) and larger (B =.14, p <.05) samples. Here the coefficient for commitmentbased HR practices remained significant in both the smaller (B =.30, p <.05) and larger (B =.27, p <.01) samples. Bias-corrected bootstrap tests again supported mediation using both the smaller (95 percent C.I. ranged from.04 to.41, p <.05) and larger (95 percent C.I. ranged from.01 to.11, p <.05) samples (Preacher & Hayes, 2008). Thus, Hypothesis 3 was supported. Discussion and Conclusions The purpose of this study was to demonstrate how small businesses can benefit from systems of HR practices focused on employee commitment. This goal fits with recent calls in SHRM research to more closely fit the systems of HRM practices to the strategic environment that is being studied (Kehoe & Collins, 2008). We argued that in order to fully understand these systems of HR practices in the small-business context, it is necessary to understand how small businesses understand and implement systems of HR practices. Prior research indicates that a lack of structure and sophistication in these small businesses implies that it is often the organization leader (CEO or owner) who is responsible for the design and implementation of any HR systems (Hornsby & Kuratko, 2003). We further argued that a focus on leaders organizational models regarding HR is an appropriate way to understand commitment-based HR systems in this context (J. N. Baron et al., 2001). Following on this logic, an HR system that emphasizes attachment based on relationships with employees, selection based on cultural fit, and control based on informal controls and autonomy would best represent how small-business leaders perceive commitmentbased HR practices. Following a relational perspective (Sun et al., 2007), we argued that this system of HR practices based on owners commitment model would have a positive impact on performance and that this impact would take place through increased employee involvement and lower quit rates. Findings from this study reveal that (1) a set of highcommitment HR practices based on leaders organizational models has a positive effect on the performance of small businesses and (2) employee involvement and quit rates partially mediate the relationship between this set of HR practices and performance. Implications for Theory We make a significant contribution by building on past theory regarding the context of small businesses to propose appropriate HR practices for that specific context. Because An HR system of leader-driven HR systems, resource constraints, and lack of that emphasizes structure, practices focused on the way in which small-business attachment based leaders view commitment-based on relationships HR practices are more appropriate for this important context. with employees, Further, this study contributed to SHRM theory by demonstrating selection based the mechanisms through which on cultural fit, and these HR practices contributed to firm-level performance in small control based on businesses. While there are arguments that HR directly impacts informal controls firm-level performance, it is commonly understood that the effect and autonomy would of HR management on performance is primarily through other best represent how mechanisms. Our findings demonstrate some of the processes small-business through which HR management leaders perceive contributes to firm performance, commitment-based shedding light on the black box of HR management to performance mechanisms in the small- HR practices. business context. In addition, our study sheds light on the role of employee exchange relationships in the HR-to-performance process. Recently, researchers have argued that systems of HR

16 168 HUMAN RESOURCE MANAGEMENT, MARCH APRIL 2013 practices influence performance through supporting the establishment of exchange relationships with employees (Sun et al., 2007). Our findings provide support for this relational perspective in the small-business context as the effect of HR practices on performance takes place through involvement and lower quit rates. Involvement and lower quit rates both represent willingness on the part of employees to engage with their employer and contribute their knowledge and effort in exchange for the motivation and support represented by the HR practices. Practical Implications Prior research on HR management in small businesses indicates that small-business leaders recognize the importance of HR management (Hornsby & Kuratko, 2003). Given the risks faced by smallbusiness leaders and the importance of the small-business con- This study text to employment and the contributed to economy, it is important to understand how small-business SHRM theory by owners can leverage their human resources. Our findings indicate demonstrating that owners of small businesses the mechanisms can positively affect performance by implementing HR practices through which focused on employee commitment and based on leader organizational models. It appears from these HR practices contributed to firmlevel performance in benefits similar to HR practices our findings that these commitment-based HR practices provide studied previously but are more small businesses. in line with a CEO- or ownermanaged HR process often found in small businesses. Our findings further indicate that the effect of these HR practices on firm-level performance takes place through employee involvement and lower quit rates. Thus, as small-business owners seek to improve the performance of their firms through the use of HR management, any additional efforts to increase involvement and/or decrease quit rates are likely to enhance those efforts. Limitations In assessing the contributions of this study and interpreting the positive results discussed earlier, it is important to take into account limitations. First, while we were pleased with the support that was found for our arguments regarding the mediating role of involvement and quit rates, we recognize that there are other potential mediators that were not addressed in this study. According to the behavioral perspective, HR systems influence the establishment of exchange relationships that impact employee attitudes and behaviors in ways that ultimately predict performance (Schuler & Jackson, 1987; Wright & Snell, 1998). Therefore, it is quite possible that other employee outcomes such as perceptions of organizational support and/or employee efforts could explain additional variance in the relationship between commitment-based HR practices and performance in small businesses. Future research should examine other potentially critical mediators in order to further our understanding of these processes. Second, we were unable to demonstrate causality. Though theory supports our argument for a causal relationship between our variables of interest, our data do not allow us to fully prove causality. However, our design did help to eliminate some of the typical concerns with methodology often followed in SHRM research. First, multiple sources of data (employees and managers) were used in order to reduce common-method bias (Podsakoff, MacKenzie, Jeong-Yeon, & Podsakoff, 2003). Second, one of the performance measures (revenue growth) was collected two years after the initial data collection, providing temporal precedence of the causal variable. Finally, the context of small businesses reduces some of the complexity that might be found in measuring HR practices and performance, thus reducing the potential for alternative explanations of any relationships found. Thus, while we were not able to prove causality, the article represents a significant step forward in addressing concerns

17 HRM, EMPLOYEE EXCHANGE RELATIONSHIPS, AND PERFORMANCE IN SMALL BUSINESSES 169 related to causal inference in prior SHRM studies. Third, although small businesses have been largely neglected in previous SHRM research, generalizability remains a concern. In particular, our findings may not generalize to firms with more than 200 employees or to other samples of firms with fewer than 200 employees. There is no standard definition of what constitutes a small business in previous SHRM research (Sels et al., 2006; Way, 2002), and the U.S. Small Business Administration s definition of fewer than 500 employees covers a substantial range. Furthermore, our results need to be interpreted in light of the fact that the firms we studied used services provided by an HR outsourcing firm. Although CEO perceptions of the extent to which their firms relied on this company to design and implement HR practices did not affect the empirical results, the firms in this study were notably small and stable. Therefore, future research with different samples in alternate settings is needed before firm conclusions can be drawn. Conclusion There is a growing interest in helping small firms understand how to drive higher performance through their employees in the face of constraints that they may face in terms of cash and HR professional resources (Cardon & Stevens, 2004). In our study, we looked to identify a set of HR practices that are consistent with the small-business context and argued that commitment-based HR practices that emphasize a leader view of the HR process may be a viable way for small businesses to create an exchange relationship with employees and drive higher employee motivation and, in turn, firm performance. In addition to identifying a contextually specific set of HR practices, we also added to the literature on SHRM by empirically testing two mediators between commitment-based HR practices and firm-performance outcomes. Specifically, we found that employee involvement and quit rates mediate the relationship between commitment-based HR practices, perceived firm performance, and revenue growth. MATHEW R. ALLEN is an assistant professor of entrepreneurship at Babson College. He earned his PhD in human resource studies in the School of Industrial and Labor Relations at Cornell University. Dr. Allen s research interests include strategic human resource management in entrepreneurial environments and the effective management of family enterprises. JEFF ERICKSEN is an assistant professor of human resource management in the School of Human Resources and Labor Relations at Michigan State University. He earned his PhD in human resource studies from the ILR School at Cornell University. Dr. Ericksen s research interests include strategic human resource management, project team mobilization and performance, and human resource scalability. CHRISTOPHER J. COLLINS is an associate professor of human resource management and director of the Center for Advanced HR Studies in the ILR School at Cornell University. He earned his PhD in organizational behavior and human resources from the Robert H. Smith School of Business at the University of Maryland. Dr. Collins s research interests include strategic human resource management, the link between HR practices and knowledge creation and innovation, the role of leadership and HR practices in creating employee engagement, and employment brand equity.

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