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Impact of Human Capital Management on Organizational Performance

Article  in  European Journal of Economics, Finance and Administrative Sciences · July 2011

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European Journal of Economics, Finance and Administrative Sciences
ISSN 1450-2275 Issue 34 (2011)
© EuroJournals, Inc. 2011
http://www.eurojournals.com

Impact of Human Capital Management on

Organizational Performance

Waseef Jamal
Department of Management Sciences, Foundation University
Islamabad, Pakistan
Tel: (92) (91) 9217451-2 or (92) (314) 5122033
E-mail: waseef.jamal@gmail.com

M. Iqbal Saif
Department of Management Sciences, Foundation University
Islamabad, Pakistan

Abstract
The study attempts to explain the relationship between human capital management and
organizational performance. Hypotheses were developed to test the impact of HCM on the
performance of organizations. Data was collected from 16 firms (knowledge intensive
industry segment) located in Peshawar (Pakistan) in where source of competitive advantage
is human capital namely higher education institutions and pharmaceutical firms. Employing
sample size of 316 employees and 16 executives on HCM score card and organizational
performance constructs data were collected. The reliability of the constructs is validated by
Cronbach’s Alpha value. Pearson correlation and linear regression were used to test
hypotheses. Results of the study show that firm’s HCM has a significant positive impact on
organizational performance. Study results provide support to strategy of investment in
human capital and its management for competitive advantage at organizational and national
level.

Introduction
There are many arts among men, the knowledge of which is acquired bit by bit by experience. For it is
experience that causeth our life to move forward by the skill we acquire, while want of experience
subjects us to the effects of chance. (Plato)
The new economic order, or the informational era, will do for human capital what the Industrial
Revolution did for physical capital. Human capital and knowledge-based industries are emerging as the
key to wealth creation.
Every human have intrinsic value; this idea is as old as the written history. The history of
human capital traced back to 24th century B.C. (Friedman, hatch and walker 1998, p.4). Kiker (1966)
described the methods of measuring the money value of human beings and the motives behind this.
Two methods are commonly used are the cost of production and the capitalized earning procedures.
While motives behind the measurement of money value of human were to demonstrate the power of
nation, to determine the economic effect of education, health investment and migration, for the
proposal of more equitable tax schemes, for the determination of total cost of war , for public advocacy
for the health conservation and significance of economic life for the prosperity of an individual for his
family and country, for the support of courts in the decision of compensation in the case of personal
injuries. Impact of human capital can be measured from individual point of view (investment in
education) as increase in individual return. From organizational point of view (investment in general
56 European Journal of Economics, Finance and Administrative Sciences - Issue 34 (2011)

and specific trainings) an enhancement in the market returns and from countries point of view
(investment in education, health and migration) as economic growth models.
World Bank (1995m) study based on the assessments of 192 countries conclude that global
wealth constitutes of 16% of physical capital, 20% of natural capital and 64% attributed to human and
social capital. Waetherly (2003) concluded that today the new vision is human capital management.
Nothing happens unless human being makes a concise decision to act. Johnson (2002) expressing the
importance of human capital said that all innovations are human innovations. In the end, the economy
and business are people’s systems. Therefore there is no structural capital without intellectual capital
and no intellectual capital without humans. Boxall (1998) described that the sources of superiority
depend on the quality of interest alignment and employee development in firm compared with the
industry rivals. “People are our greatest assets. Yet few practice what they preach, let alone truly
believe it” (Drucker, 1992). Pfeffer (1994) is strong proponents of the contribution of human in
strategic context. He suggested that human resource need to be treated as permanent rather then
contingent resources. The organization must capture the benefits of any firm- specific competencies
and capabilities that they develop.
The work of Mincer, Schultz, and Becker on human capital provides brief description about
investment in human beings. Schultz (1971, p 8, 26, 68) classified investment in human capital in five
categories: Schooling and higher education, on the job training, migration, health and economic
information. Schultz described that by investing in themselves people can improve enlarge the range of
choices available to them. It is the one way free men can enhance their welfare through.
Becker’s model (1962) gives birth to the following predictions:
Firms are willing to invest in human capital to develop firm specific skills that are productive at
the current firm but not at other firms.
Firms are unwilling, however, to invest in human capital to develop general skills (as they
cannot recoup their investment in general skills training because worker can simply move to new firms
if they are paid less then their marginal value product). As a result, worker themselves must bear the
cost of any general skills training that they receive, either directly or by accepting lower wages.
According to Weisbrod (1962) the principal forms of direct investment in the productivity and
well-being of people are: health, learning (both in school and on the job), and location (immigration).
Chen and Lin(2005) defined investment in human capital as input made by company in talents and
technology that benefit competitive advantages, are valuable and unique, and should be kept out of
reach of other companies. In other words, only employees possessing these qualities are qualified as
human capital. Khandekar and Sharma (2003) concluded that firm that make greater use of HR
capabilities are likely to gain a sustainable advantages and enjoys superior performance. Kannan and
Akhilesh (2002) described that to enhance the organizational performance in IT industry in India the
managers have to understand the characteristic and behaviors of higher performing employees. Brooks,
Hairston and Nafukho (2006) showed the clear relation of organizational HRD and organizational
productivity. Hitt, Hoskisson, Harrison and Summers (1994) described that for US firm to attain
competitive advantage, they have to focus on the development and retention of human capital with a
culture of creativity and life-long learning. Bassi, Harrison, Ludwig and McMurrer (2004) concluded
that investments in HC (Training Investment) are positively related to stock market performance. They
stated that investors would be well served by considering firms’ human capital investment strategies as
an integral part of their investment decision. Friedman, Hatch and Walker (1998, p-14, Box 1.4)
described the studies had success in finding the relation between investment in human capital and
company performance. Bontis, Koew and Richardson (2000) concluded that for organization it is not
enough to hire and promote the brightest individual it find. The organizations must nurture and support
them into sharing their human capital through organizational learning and externalities into information
system to positively affect the business performance. Saenz (2005) concluded that the human capital
have a clear bearing on the value reflected by its market-to-book ratio. Chen, Cheng and Hwang (2005)
proved that greater human capital efficiency of organization tend to have higher market-to-book value
ratios. Almeida and Carneiro (2006) concluded that investments in human capital have on average
57 European Journal of Economics, Finance and Administrative Sciences - Issue 34 (2011)

negative returns for those firms which do not provide training, while estimate of returns for firms
providing training are quite high, with lower bound being of 17% and our preferred estimate being
24%. Such high returns suggest that company job training is a sound investment in human capital for
firms and for the economy as a whole, possibly yielding higher returns than either investments in
physical capital or investments in schooling. Seleim, Ashoure, Bontis (2007) proved a positive relation
in human capital and organizational performance. Hitt, Bierman, Shimizu and Kochhar (2000)
concluded by empirical analyses of 93 firms with a data span of 1987-91 that leveraging human capital
has positive impact on the performance and having a curvilinear effect. While human capital also plays
a moderating role between firm strategy and performance.
Shah and Bandi (2000) concluded that to enhance the capabilities of organization in knowledge
intensive IT enabled services in India the HR practices has to be focused on the core asset of human
capital. Wiesberg (1996) studied the impact general human capital (GHC) and firm specific human
capital (SHC) by analyzing performance of 65 workers in 20 groups and found significant positive
correlation between GHC, SHC and firm performance. Black & Lyunch (1997) examined the
relationship between work practice, information technology and investment in human capital and firm
performance. Study covered the period of 1987-1993. Study concluded that impact of practices is in its
implementation not adoption, and the higher education level and greater use of computer of production
worker has a positive impact on firm productivity. Seleim, Ashour and Bontis (2006) empirically
studied 38 software development organization of Egypt and found a positive correlation between
human capital and organizational performance. Bassi and Mcmurrer (2004) analyzed S&P companies
for data span (1996-98) to assess the impact of training on firm stock price. The study concluded that
firm stock return increases by 1 basis point for each additional dollar invested in training have a
positive correlation. Wan (2007) concluded by analyzing 4 MNC’s globally and locally owned that
human capital development policy have an effect on employee’s satisfaction and organization policy.
Chen, Chang and Hwang (2005) found empirical support for the hypothesis that the companies having
greater human capital efficiencies have higher market to book value and also that intellectual capital
efficiency affect the financial performance of the companies. Hurwitz, Lines, Montogomery and
Schmidt (2002) concluded that vital role has been played by human capital for the driving intangible
performance and stock return. Switzer and Huang (2007) finding suggests that variances in fund
performance is attributed by managerial human capital characteristics. Bart (2001) analyzed data set of
559 organization and found significant correlation between firm mission statement and human
intellectual capital, ultimately effect the performance of the firm. Huselid, Jackson and schuler (1997)
analyzed 293 U.S based firm to measure the impact of human resource manger on human resource
effectiveness and its impact on performance of the firm. Study concluded that human resource
effectiveness is associated with the capabilities of the employees also having a relationship with
productivity, cash flow and firm market value. Barrett & O’Connell (2001) used data obtained from
survey of Ireland enterprises to estimate the impact of training on productivity of firm. Result of the
study showed a statistically significant positive correlation between training and productivity of the
firm. Collins & clark (2003) study investigated the relationship of network building HR practices and
firm performance. It was found that the relation is mediated through top management social networks.
Guest,Michie, Conway and Sheehan (2003) examined 366 UK companies using subjective and
objective measure of performance to investigate the relationship of HRM and performance. It was
found that by using objective measure of performance turnover and financial performance showed
association with HRM. HRM have no higher association with productivity, using subjective measure
HRM have an association with productivity and financial performance. Huselid (1995) study linkage
between HRM practices, turn over, productivity and financial performance of the firms. It was found
that high performance work practices have an economically and statistically significant impact on
productivity, turnover and financial performance. Patterson, West, Lawthom and Nickell (1998)
concluded that HR practices contribute 18%, 19% variation in companies productivity, financial
performance respectively. HR practices are the main reason for variation in comparison to Strategy,
R&D, Quality and technology. Molina & Ortega (2002) analyzed 405 North American firms to
58 European Journal of Economics, Finance and Administrative Sciences - Issue 34 (2011)

investigate the relationship of Human Capital Resource policies and firm performance. It was
concluded that effective human capital management enhance employees satisfaction resulted in
customer loyalty which, in turn enhance the financial performance. Strother, Koven, Howerth and Pan
(2004) tested the hypothesis to measure the impact human capital program on the human capital
growth and found a significant positive impact. Zula & Chermack (2007) concluded that proper human
capital planning effect the organization profits. Employees (intangible assets) add value to bottom line
through enhance knowledge. Bontis & Serenko (2009) concluded that measurement and strategic
management of intellectual capital will be the lone important management activity in knowledge era
for drawing performance. Glade & Ivery (2003) concluded that work climate, HR practices and
business performance have a significant correlation. Singh (2004) studied 82 Indian organizations to
investigate the relation of HR practices and firm performance. Study concluded that HR practices
(Compensation and training) have a significant relationship with firm performance. Bhattacharya,
Gibson and Doty (2005) concluded that HR practices of the firm have a significant relationship with
firm financial performance. Wright, Gardner, Moynihan & Allen (2005) concluded that HR practices
have a high correlation with firm performance.
The above literature elaborates the significance of investment in human capital, development of
HR practices and its relationship with organization productivity and performance at macro and micro
level. These researches are conducted at developed part of the world. The study is being undertaken to
analyze the situation of an under developed country to investigate the relationship of human capital
management practices and organizational performance. After analyzing the above literature one of the
reasons of the third world generally and Pakistan specifically to be poor, is it’s under investment in
human capital. Divergence between economic growth and human development is greater in Pakistan
than in most of other third world countries. Pakistan presents a fascinating combination of many
contradictions. The country literacy rate is among one of the lowest in the world, yet some of its highly
educated people have dominated many international forums, weak institution and strong individual,
economic growth without human development, private greed and lack of social compensation and
election rituals without real democracy (Mahbubul haq, 1997, p-37). Human capital development
remains a major structural challenge. Despite the recent rise in pro-poor spending, historical under
investment in human capital has critical implications for growth and competitiveness. Public spending
on education was only 2.0% of GDP in 2004, compared with 6.0% in Malaysia, 4.0% in Thailand
(Asian Development Outlook, 2007, 193). Pakistan has human development index rank of 134, having
HDI 0.539 (Human development report, 2006). World Economic Forum ranked Pakistan 92 out 133
countries (The global competitiveness Report 2007-2008). Educational and health expenditures of
Pakistan are 2.4%, 0.6% of GNP (Economic survey of Pakistan 2006-2007). Nearly half of the
population of Pakistan is illiterate i.e. 47%, with participation rate of 32.2%, having 50.05million labor
force which is small number and also include 18.43% of children of age of 10-14 of both sex (FBS,
2005-2006). The educational investment in Pakistan in the last 60 year did not reach to 3% of the GDP.
According to National education census 2005 only 51.6% of the educational institution have
satisfactory situation according to building condition (Education census, 2005). Inadequately educated
labor force having score of 10.7 is one of the most problematic factor in doing business in Pakistan
(The global competitiveness Report 2007-2008). Mustafa, Abbas and Saeed (2005) stated that there is
serious mismatch between the job demands in the emerging economy and supply of human capital in
the country. Technical and Vocational training as well as the formal education is not standard enough
to fill the skill gap and the problem of brain drain is adding to the country miseries. All these show
how poorly Pakistan has translated its income in the lives of its people. Khan (2005) stated that for
Pakistan investment in human capital will serve the dual purpose by having productive worker and a
tool for elimination of poverty. Pakistan had achieved even higher growth rates, had it invested more in
its human capital.
This paper will empirically investigate the relationship of human capital management and
organizational performance.
59 European Journal of Economics, Finance and Administrative Sciences - Issue 34 (2011)

Theoretical Frame Work

This study is being undertaken to investigate the relationship between human capital management and
organizational performance. With rapidly changing environment, the art of forecasting has become
complicated and uncertain in identifying core building block of organization competitive advantage.
World progress from agriculture to industrial and knowledge economy change the agents for the
economic growth from land to steam engine and human capital. Technology, strategy, global alliances
and innovations known as source of competitive advantage in knowledge era are dependent on human
talent. Sources of future organization economic power rest in effective management of best human
talent in market place (Simth & Kelly 1997, p-199). The relationship of investment in human and
performance at individual, organizational and economic level has been verified by empirical and
theoretical studies and make the strong case for investment in human capital for regional development
(Becker 1964, Shultz 1958, Mincer 1962, Lucas 1988, Roomer, 1986, 87, 90, Bontis 1999, Bontis &
Fitz-enz, 2002, Huslaid 1995, etc). literature reveals that human capital management is measured by
using different methodologies but still the scientist are not able to have a universal frame work for the
measurement of human capital management. The present study is an effort in this direction.
For current study human capital management is taken as independent variable. The human
capital management is comprises of the five dimensions (Leadership practices, Knowledge
accessibility, Learning capacity, Workforce optimization, Employee engagement) define by Bassi &
McMurrer (2007).
Performance of the organization the dependent variable is measure by using the scale developed
by Bontis (1999) having ten factors to measure performance at ten point scale (Industry Leadership,
Future Outlook, Profit, Profit Growth, Sales Growth, After-tax return on assets, After-tax return on
sales, Overall response to competition, Success rate in new product launches and Overall business
performance and success. The schematic diagram represents the formation of the indices and variables.
60 European Journal of Economics, Finance and Administrative Sciences - Issue 34 (2011)

Theoretical Framework

Communication

Inclusiveness

Supervisory Skills
Leadership
Practices

Executive Skills

Systems

Process Industry Leadership

Conditions
Work force
Future Outlook
optimization
Accountability

Hiring Decision Profit

Systems
Profit Growth
Availability

Knowledge Sales Growth

Collaboration and access ability Human Capital Performance
Team work Management
After tax return on
Information assets
Sharing
Systems
After tax return on
sales

Innovation
Overall response to
Training competition
Learning
Capacity
Development
Success rate in new
product launches
Value and Support

Overall business
performance and
Systems success

Job Design

Commitment to Employee
employees engagement

Time

Systems

Hypothesis
The preceding theoretical frame work guide for the development of the following hypothesis:
H1: Human capital management is positively related to organizational performance.
H2: organizational score on Human capital management significantly predict their
organizational performance.
61 European Journal of Economics, Finance and Administrative Sciences - Issue 34 (2011)

Population
Becker & Gehart (1996) suggested that firm’s level analysis is the most direct and generalizble test of
HR – performance relation. The study was design to be conducted at the firm level in the knowledge
intensive industry such as privately owned universities, and pharmaceuticals companies. Starbuck
(1992) suggests that firms in which knowledge has more importance than other inputs and human
capital, as opposed to physical or financial capital dominates can be applied as knowledge intensive.
Application of expertise for the solution of the complex problems and to provide innovative solutions
is another distinction of knowledge intensive firms.
The reasons for the selection of knowledge intensive industry are that firms compete on the
basis of intangible assets, particularly human capital and knowledge intensive industry composed
mainly of knowledge workers whose work processes and contributions to the firm are relatively similar
across the industry. The population for the study comprise of the private universities working in
Peshawar and local pharmaceutical companies in Peshawar.

Sampling
To investigate the relationship of variables, a total of 450 questionnaires were distributed to the
employees in 16 organization i.e. 10 universities and 6 pharmaceuticals firms, out of which 316
questionnaires were returned. This resulted in the total usable sample size of 316 participants from
employees with response rate of 70 %. A total 16 questionnaires were also completed from the
executives of these organizations.

Instrument
The data collection instrument for the present study was comprised of two parts: the first part served as
introduction for study and instruction for the completion of the questionnaire. The second part assessed
the main variables for the study. The demographic information was not acquired to minimize the bias
of identification. The below paragraph explain the second part of the instrument.

Second Part
The second part of the instrument measure organizational position on human capital management
(leadership practices, workforce-optimization, learning capacity, knowledge accessibility) and
organizational performance. The respondents of the study were knowledge worker, helping in
comprehension and understanding of the questionnaire. The items were asked in continuity without any
distraction, because all items were asked on same 5 point rating scale (likert scale) to measure variables
of interest. The used of separators avoided to hold respondent attention and get responses in natural
flow.

Human Capital Management

Human capital management was assessed through a scale developed by Bassi & McMurrer (2007)
based on human capital management frame work. Human capital management assessed through 23
HCM practices that fall within five broad categories of HCM drivers.
Leadership Practices: Managers’ and leaders’ communication, performance feedback,
supervisory skills, demonstration of key organizational values, efforts and ability to instill confidence.
Tool contain 12 items to measure 5 HCM practices (Communication, inclusiveness, supervisory skill,
executive skill and system) using 5 point rating scale, where 1 represent “strongly disagree” and 5
present “strongly agree”. The total score of 12 items than can be range from 12 to 60. The higher the
62 European Journal of Economics, Finance and Administrative Sciences - Issue 34 (2011)

score indicate organization higher ability in management of HCM driver of leadership practices. The
Cronbach’s alpha reliability value of 0.689
Workforce Optimization: The organization’s success in optimizing the performance of its
workforce by establishing essential processes for getting work done, providing good working
conditions, establishing accountability, and making good hiring choices. Tool contain 16 items (13 to
28 on scale) to measure 5 HCM practices (process, conditions, accountability, hiring decision and
system) using 5 point rating scale (Likert scale), where 1 represent “strongly disagree” and 5 represent
“strongly agree”. The total score for the 12 items range from 12 to 60. The higher score indicate
organization higher ability in management of HCM driver of workforce-optimization. The Cronbach’s
alpha reliability value of 0.843.
Knowledge Accessibility: The extent of the organization’s “collaborativeness” and it capacity
for making knowledge and ideas widely available to employees. Tool contain 8 items (29 to 36 on
scale) to measure 4 HCM practices(availability, collaboration & team work, information sharing and
system) using five point rating scale, where 1 represent “strongly disagree” and 5 represent “ strongly
agree”. Total score for the 8 item ranges from 8 to 40. The higher score indicate organization higher
ability in management of HCM driver of knowledge accessibility. The Cronbach’s alpha reliability
value of 0.795.
Learning Capacity: The organization’s overall ability to learn, change, innovates, and
continually improves. Tool contain 10 items(37 to 46 on scale)to measure 5 HCM practices
(Innovation, Training, Development, Value & Support and Systems) using 5 point rating scale, where 1
represent “strongly disagree” and 5 represent “strongly agree”. Total score for 10 items ranges from 10
to 50. The higher score indicates organization higher ability in management of HCM driver of learning
capacity. The Cronbach’s alpha reliability value of 0.829.
Employee Engagement: The organization’s capacity to engage, retain, and optimize the value
of its employees hinges on how well jobs are designed, how employees’ time is used, and the
commitment that is shown to employees. Tool contain 10 items(47 to 56 on scale) to measure 4 HCM
practices (innovation, commitment to employees, time and system) using 5 point rating scale, where 1
represent “strongly disagree” and 5 represent “strongly agree” total score for 10 items range from 10 to
50. The higher score indicates organization higher ability in management of HCM driver of employee
engagement. The Cronbach’s alpha reliability value of 0.826.
The systems questions have been asked from executive because they would in good position of
elaboration. To have equal weight age for all the drivers those having five factors are multiplied by 0.8
(Bassi & McMurrer, 2007)

Organizational Performance
Organizational performance is assessed through scale developed by Bontis(1999). The organizational
performance is measured with 10 item scale 10 point rating scale which was reduced to 5 point rating
scale where 1 represent “poor” and 5 represent “excellent”. Total score on 10 item scale ranges from
10 to 50. The higher score indicates the higher organizational performance. The Cronbach’s alpha
reliability value of 0.86.

Result and Discussion

The result of table#1,2 shows that human capital management is positively correlated with
organizational performance (r=0.297,0.797 p=.00) for both employees and executive data sets.
63 European Journal of Economics, Finance and Administrative Sciences - Issue 34 (2011)
Table 1: Showing correlations between dependent and independent variable (for Employees)

Performance HCM
Performance Pearson Correlation 1 .297(**)
Sig. (2-tailed) .000
N 316 316
HCM Pearson Correlation .297(**) 1
Sig. (2-tailed) .000
N 316 316
** Correlation is significant at the 0.01 level (2-tailed).

Table 2: Showing correlations between dependent and independent variable (for Executives)

Performance HCM
Performance Pearson Correlation 1 .797(**)
Sig. (2-tailed) .000
N 16 16
HCM Pearson Correlation .797(**) 1
Sig. (2-tailed) .000
N 16 16
** Correlation is significant at the 0.01 level (2-tailed).

Predicting Organizational Performance

The presence of strong positive association between organization HCM and organizational
performance suggested that organization’s future performance could be predicted on the basis of their
HCM scores. The study’s second hypothesis implies that organization HCM scores significantly
predict their organizational performance. As a single continuous dependent variable (Organizational
performance) and a single continuous independent variable (HCM) is involved in this case, so simple
linear regression analysis was applied. This test produces the significant values for hypothesis testing
regarding individual regression parameters. Results given in table 3 & 4 showed a significant F value
(less than .05) for the prediction relation between HCM and Organizational performance. Thus our
hypothesis was supported which asserted that Organizations’ scores on human capital management
significantly predict the future organizational performance.

Table 3: Showing prediction of Organizational performance through scores on HCM (for Employees)

Sum of
Model Df Mean Square F Sig.
Squares
1 Regression 4.152 1 4.152 30.488 .000(a)
Residual 42.761 314 .136
Total 46.913 315
a. Predictors: (Constant), HCM
b. Dependent Variable: Perfor

Table 4: Showing prediction of Organizational performance through scores on HCM (for Executives)

Sum of
Model Df Mean Square F Sig.
Squares
1 Regression 3.110 1 3.110 24.413 .000(a)
Residual 1.784 14 .127
Total 4.894 15
a. Predictors: (Constant), HCM
b. Dependent Variable: Perfor

Table 3 & 4 proved only the presence of predictive relation between predictor (HCM) and
dependent variable (Organizational performance). The strength of prediction relation is shown in table
64 European Journal of Economics, Finance and Administrative Sciences - Issue 34 (2011)

5 with the help of the values of intercept and slope for HCM. The coefficients are unstandardized and
can be interpreted as percentage changes in organizational performance per unit change in respective
independent variable (HCM). The table indicated the constant value of 3.3 and a slope of .01 for the
regression line for employee’s data set. This suggested that for a one unit increase in HCM, the
respective organization can significantly predict a 1% increase in organizational performance. While a
slope of .30 for HCM was produced when the test utilized standardized independent and dependent
variables .(for employees).

Table 5: Regression Coefficients (a) for Employees

Unstandardized Standardized
t Sig.
Model Coefficients Coefficients
B Std. Error Beta B Std. Error
1 (Constant) 3.031 .132 22.905 .000
HCM .010 .002 .297 5.522 .000
a. Dependent Variable: Performance

The table 6 for the executive data set indicated the constant value of .116 and a slope of .04 for
the regression line. This suggested that for a one unit increase in HCM, the respective organization can
significantly predict a 4% increase in organizational performance. While a slope of .80 for HCM was
produced when the test utilized standardized independent and dependent variables. (for executives)

Table 6: Regression Coefficients (a) for Executives

Unstandardized Standardized
t Sig.
Model Coefficients Coefficients
B Std. Error Beta B Std. Error
1 (Constant) .116 .728 .159 .876
HCM .045 .009 .797 4.941 .000
a. Dependent Variable: Performance

The coefficient of correlation and conservative measure “coefficient of determination” was

calculated for both data sets. Here, table12 indicated R, “R square” value of 0.30, .09, which asserted
that 9 % of the explained variation in organizational performance can be accounted for organization
scores on HCM (for employees). This further supported the study’s second hypothesis.

Table 7: Model summary showing simple regression for HCM and Organizational performance (for
employees)

Std. Error of the

Model R R Square Adjusted R Square
Estimate
1 .297(a) .089 .086 .36903
a Predictors: (Constant), HCM

Table#7 indicated R, “R square” value of 0.80, .64, which asserted that 64 % of the explained
variation in organizational performance can be accounted for organizations scores on HCM (for
Executives). This further supported the study’s second hypothesis.

Table 8: Model summary showing simple regression for HCM and Organizational performance (for
employees)

Std. Error of the

Model R R Square Adjusted R Square
Estimate
1 .797(a) .636 .610 .35695
a Predictors: (Constant), HCM
65 European Journal of Economics, Finance and Administrative Sciences - Issue 34 (2011)

Discussion
Correlation between HCM and Organizational Performance
Based on the previous research, significant positive correlation was expected between HCM practices
and organizational performance. So, study’s first hypothesis states that organization HCM practices are
positively correlated with organizational performance. Pearson bivariate correlation coefficient was
calculated to measure the association between HCM practices and organizational performance. The
results of executive data set indicated a high positive correlation (r = .80, p<.01) between the
independent (HCM) and dependent variable (organizational performance). The result of employee data
set indicated a low significant positive correlation (r=.30, p<.01) between independent variable (HCM)
and dependent variable (organizational performance.
Bhattacharya, Gibson, and Doty (2005) reported the similar results, (r=.3, p<.01) that
organization HR flexibility was positively associated with return on sales, operating profit per
employee, and sales per employee. Huselid, Jackson & schuler (1997) concluded that one percent
increase in hr practices effectiveness was resulted in increase of 5.2% in sale per employees and 16.5%
increase in organizational cash flows.
Huselid (1997) study showed that one standard deviation change in HR system was associated
with 21 percent change in share holder value. The result of the studies shows a significantly positive
correlation of HR practices and organizational performance. Seliem, Ashour & Bontis (2006) study in
software industry showed that human capital (super star developer, star developer) has significantly
positive correlation (r=.662, .489, p<.01, .05). The result of the study is consistent with present study.

Predicting Organizational Performance

Study’ second hypothesis implies that organizational score on Human capital management
significantly predict their organizational performance. The results proved that HCM reserves the ability
to significantly predict organizational performance. Through regression equation, the slope value for
HCM to predict the value of DV (OP) for both data set (Executives and Employees) was calculated as
.04, .01 and coefficient of determination which showed explained variation as .64, .09 respectively.
Sing (2004) concluded that HR practices accounted for 34%, 32% of the explained variation in
perceived organizational performance and perceived market performance.
Molina and Ortega (2002) in a theoretical study showed that effective human capital
management leads to employee satisfaction which results in employee’s loyalty and leads to better firm
performance in terms of Tobin’s Q and TRS. The research supports the result of the study.

Directions for Future Research

This study though makes important and valid contributions to theory and corporate setting but has left
some of areas unexplored. The study only relates and predicts performance on the basis of HCM.
Future researchers may investigate as to which indicator leads to higher performance and why? It only
measures the association and prediction relation for HCM-performance relation in knowledge intensive
industry setting, whereas the future studies may validate the relations for other industries both in public
and social sectors. The study employs a weak sampling technique (convenience sampling) to select the
sample that may be avoided by a future researcher employing probability sampling method.
The study relied on a self report measure of HCM that correlates with the existing measures of
organizational performance, whereas the future researcher may go for an objective organizational
performance measures.

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