Strategic HR system differentiation between jobs: The effects on firm performance and employee outcomes

• Author: Joseph A. Schmidt,Chelsea R. Willness,Dionne Pohler
• Published date: 01 January 2018
• Date: 01 January 2018
• DOI: http://doi.org/10.1002/hrm.21836

HR SCIENCE FORUM

Strategic HR system differentiation between jobs: The effects

on firm performance and employee outcomes

Joseph A. Schmidt

1

| Dionne Pohler

2

| Chelsea R. Willness

1

1

Edwards School of Business, University of

Saskatchewan, Saskatoon, SK S7N 5A7

2

Centre for Industrial Relations and Human

Resources, University of Toronto, Toronto,

ON M5S 2E8

Correspondence

Joseph Schmidt, Edwards School of Business,

University of Saskatchewan, 25 Campus

Drive, Saskatoon, SK, Canada S7N 5A7,

Ph: 306.966.4741,

Fax: 306.966.2514,

jschmidt@edwards.usask.ca

Funding information

Canadian Tourism Human Resource Council

and the Social Sciences and Humanities

Research Council of Canada, Grant/Award

number: #430-2014-00383.

The purpose of this research was to understand whether firms apply different human resource man-

agement systems to different occupations within the same organization (HR differentiation) and

how the extent to which they do so may influence firm and employee outcomes. We conducted

two studies pertaining to these questions. The first study was based on data collected from man-

agers, and the results suggest that firms differentiate their HR investments based on the strategic

value of occupations to the firm, which was further associated with the human capital of those occu-

pations. Differentiation in human capital was also associated with firm performance. The second

study was based on data obtained from nonmanagement employees. The findings indicated that

employees who were recipients of less HR system investment had lower fairness perceptions, which

were further associated with higher turnover intentions and lower organizational citizenship behav-

ior. Although the evidence from these studies suggests that firms may realize benefits from strategic

HR system differentiation, managers should carefully consider how to balance the effects of differ-

entiation on firm performance and employee well-being before implementing such systems.

KEYWORDS

fairness perceptions, high-performance work systems, human capital, human resource

management, organizational citizenship behavior, turnover

1|INTRODUCTION

A core objective of strategic human resource (HR) management

research is to understand how firm investment in HR systems and

practices affects organizational performance (Delery & Doty, 1996).

However, one area that has received relatively little theoretical and

empirical attention is the extent to which firms make differential

investments across occupation groups within the same organization

and what impact this has on employee attitudes, behavioral inten-

tions, and firm performance. One of the earliest perspectives in stra-

tegic HR management, the universal approach, proposed that greater

organizational investment in HR would unilaterally improve firm per-

formance by increasing the ability and motivation of all employees

in the organization (Huselid, 1995). In contrast, scholars emphasizing

acontingency approach have shown that an important factor for

understanding the HR-performance linkage is the alignment

between the type and amount of HR investment with the firm's

competitive environment and operational strategies (e.g., Datta,

Guthrie, & Wright, 2005; Delery & Doty, 1996; Youndt, Snell,

Dean, & Lepak, 1996). Theory in this latter tradition, as well as lim-

ited empirical research, has more recently focused on the applica-

tion of different HR systems across different occupations within the

same firm based on the strategic value of the occupational skill set

required for each occupation, the firm-specific nature of the

required skill sets, and the availability of the occupational skills in

the labor market (Lepak & Snell, 1999, 2002; Lepak, Taylor, Tekleab,

Marrone, & Cohen, 2007).

Contingency researchers often apply h uman capital and cost–

benefit arguments to explain why organi zational decision makers

differentiate HR investments between occupation groups within

the same organization. Lepak and Snell ( 1999) posited that man-

agers explicitly consider both the tr ansaction and labor costs asso-

ciated with different types of HR syste ms to determine whether

HR investments will produce the desired returns. They suggested

that occupations that have a greater impact on achieving th e firm's

strategic objectives or that require un ique skill sets receive greater

HR investments, either because they have a disprop ortionate

impact on creating value for the firm or because it is mor e difficult

DOI: 10.1002/hrm.21836

Hum Resour Manage. 2018;57:65–81. wileyonlinelibrary.com/journal/hrm © 2017 Wiley Periodicals, Inc. 65

to find employees with the relevant skills. Oth ers have applied sim-

ilar logic to explain why the firm's pivotal talent (Cascio & Bou-

dreau, 2008) or “A positions”(Huselid, Beat ty, & Becker, 2005)

require greater HR investments. More recently, Kaufman (2015)

highlighted the importance of using economic mode ls that more

accurately explain how the adoption of HR systems is based on

considerations of the marginal costs versu s the expected marginal

returns of the system.

To date, some empirical research has supported these arguments,

finding that firms differentiate HR systems between occupation

groups, with strategically valuable occupations receiving greater

investment (Lepak & Snell, 2002; Lepak et al., 2007). However, the

extent to which within-firm HR system differentiation across occupa-

tions influences organizational performance has received relatively lit-

tle attention. Further research is required to explicate the

consequences of within-firm HR differentiation, both in terms of its

effects on firm performance and its influence on employee attitudes

and behaviors (Becker & Huselid, 2006; Huselid & Becker, 2011;

Jackson, Schuler, & Jiang, 2014).

This is an important line of inquiry because HR system differenti-

ation has the potential to reduce perceptions of fairness (Lepak et al.,

2007) and organizational commitment (Marescaux, De Winne, & Sels,

2013) among employees who receive lower investments. Human cap-

ital and cost–benefit models based on transaction and labor costs,

and the marginal productivity of employees, do not account for the

potential psychological and behavioral costs (e.g., Larkin, Pierce, &

Gino, 2012; Pohler & Schmidt, 2016) associated with the adoption of

a differentiated HR architecture within the organization. If employees

perceive HR differentiation to be unfair, these costs may include

lower performance, job withdrawal, decreased citizenship behaviors,

and negative reactions including theft and other retaliatory behaviors

(Colquitt, Conlon, Wesson, Porter, & Ng, 2001). Such costs often do

not factor into HR investment decisions because they can be difficult

for managers to quantify (Kaufman, 2015). Given the potential for

these additional psychological and behavioral costs, particularly

among those employees who receive fewer investments, the gains

that arise from higher investments in occupations that make more

valuable contributions to the firm may be insufficient to offset the

overall costs of differentiation. To date, however, we know little

about how employees perceive and respond to strategic occupation-

based differentiation.

We address these gaps in the literature through a two-study

approach. In Study 1, we drew upon universal and contingency the-

ories in strategic HR, as well as how contingency theorists have

applied cost–benefit analyses and marginal productivity, to under-

stand firm-level HR investment. We tested theoretical propositions

about the extent to which firms differentiate their HR system invest-

ments based on the strategic value of occupations to the organiza-

tion. We further tested theoretical propositions derived from social

exchange theory about the association between HR system invest-

ment, human capital, and turnover rates at the occupation level.

Finally, we examined the effects of strategic HR differentiation on

firm performance.

Exploring the link between HR differentiation and firm perfor-

mance is only part of the story; employees are a critical linchpin in

determining the relative effectiveness of an organization's HR prac-

tices. Thus, employee perceptions of HR practices are an important

mechanism that can explain why HR differentiation and organizational

outcomes are connected (or not). In Study 2, we gathered data from

front-line employees to test hypotheses derived from the group value

model (e.g., Lind, 1995; Tyler, 1989) and the group engagement

model (Tyler & Blader, 2003) about how employees' perceptions of

HR differentiation within their organization influences their turnover

intentions and willingness to engage in organizational citizenship

behaviors, as mediated by their perceptions of fairness. We further

tested a moderation effect to determine whether the association

between HR differentiation and fairness perceptions was contingent

on the amount of HR investment in the respondents' own occupation

groups.

This research makes three primary contributions. As one of the

first studies to test the associations between within-firm occupation-

based HR differentiation and human capital, quit rates, perceived

financial performance, and employee attitudes and behavioral inten-

tions, this research has the potential to develop theory about how

the HR system architecture influences employee- and firm-level out-

comes. Second, this research helps to bridge the micro/macro divide

in the HR literature (Becker & Huselid, 2006; Paauwe, 2009) by col-

lecting firm-level data from senior managers and frontline employee

attitudes from two different samples. The approach allows us to

determine the extent to which both groups perceive HR differentia-

tion within firms, and whether frontline employee perceptions about

HR differentiation are consistent with any association between stra-

tegic HR differentiation and firm performance.

Finally, this research has practical implications by clarifying the

types of costs that need to be considered by organizational decision

makers when determining how to allocate HR investments—for

instance, whether managers should account for psychological costs,

such as employee perceptions of (un)fairness, that are likely more

challenging to quantify. Even if these costs are not found to be

important, strategic HR research has not explicitly highlighted the

potential for conflicting interests between organizations and at least

a subset of employees in “less valuable”occupations. If, as has been

argued by others, balancing the interests of owners and management

with the interests of front-line employees is an important normative

goal in managing the employment relationship (Budd, 2004; Pfeffer,

2010; Pohler & Luchak, 2014), we need more empirical studies that

explicitly highlight the impact of the trade-offs that are being made

by each party.

2|STUDY 1

2.1 |HR System Differentiation between

Occupations within the Same Establishment

The objective of Study 1 was to gather data about the potential

antecedents and consequences of within-firm HR system differentia-

tion from the perspective of managers. Strategic HR theorists

adopting a universal or “best practices”approach have shown that

appropriate investments in HR will increase performance across all

organizations (Huselid, 1995). Investments in what have been called

66 SCHMIDT ET AL.