Human Resources for the Emerging Firm

Abstract

It is the goal of most new business ventures to become viable operations that are successful over the long term. In some cases, the firm remains small, consisting of the individual or team that started the business venture. However, the owners of many new ventures desire to grow beyond this point, and hire employees to support continuing organizational success and growth. When this happens, it is necessary to put a human resource system into place so that employees are treated equitably and personnel decisions are made objectively, based on empirical data. Good human resource systems also encourage high performance and reward employees for contributing to the success of the organization. Although designing and implementing a good human resource system can be intimidating, there are many aids available to the small business owner to help in this endeavor.

Overview

Starting a new business is by definition an adventure. The entrepreneur or team develops a new idea or product that fills a need in the real world. Sufficient funding is obtained and the initial marketing effort is effective. If this trend continues and the client or customer list continues to grow and orders increase, the entrepreneur realizes that it is time to expand. Since in most cases the development of a viable, growing business was the goal from the beginning, this is a good thing. However, once the business expands beyond the entrepreneur or the original team, it begins the transition from being a free-form group of innovators who do things their own way to being a business with employees (who probably will not have the same vision and enthusiasm as the original team). When this happens, the organization must develop and implement a human resource system.

Human resource management is an essential function in any business. It is the human resource system of an organization that determines what types of people need to be hired in order to support the organization's goals and processes and that sets the standards for hiring the desired personnel. It is the human resource system that provides the training that helps employees meet the organization's goals and mission. It is the human resource system that evaluates employees' performance and rewards them for supporting the success of the organization. Without productive employees, the organization would cease to function. Without a well-structured human resource system, employees would not be enabled to do their jobs well and would have difficulty supporting the organization's mission.

As important as human resources are for the success of an organization, the emerging firm may find it difficult to develop and implement a strong human resource system. One reason for this is that when there is no human resource system already in place, it is difficult to know where to start. Some human resource functions are obvious: hiring employees, paying wages, providing training. Other functions, however, may be less obvious: developing solid job descriptions, setting fair performance appraisal practices, and determining ways to reward employees' performance in a way that promotes the goals of the organization. Setting up a new human resources system in an emerging business is different from refining one that is already functioning. As opposed to established organizations with extant human resources systems, the emerging organization must determine what functions are needed and develop and implement the appropriate policies and practices. This not only requires a different skill set than is needed to start the technical side of a new venture, but also requires a different skill set from the running of an established human resources system.

It may be tempting for the emerging organization to skimp when designing their first cut at a human resources system. The decision-makers may not know all the functions that human resources should fulfill in an organization, or they may think that some of the functions are not important for a small business. Such thinking may be compounded by the fact that emerging organizations tend to have a very limited budget for expenses perceived as not directly contributing to the bottom line. Without understanding the importance of the human resource system and its contributions to organizational success, therefore, it might be tempting to cut back on that portion of the budget.

However, research has shown that an effective human resource system can be a significant contributor to the performance and success of organizations. It is the human resource system that develops and implements the policies and practices that determine who is hired or even who applies for a job at the company in the first place. Once employees are hired, it is the human resource system that sets the tone for how the organization values and treats them. This treatment can significantly impact how vested employees are in the success of the company and whether or not they feel motivated to perform, not only in ways that meet the minimum requirements of their jobs, but that enhance the performance of the organization as a whole.

Not only does good human resource functionality in an organization contribute to its success: Lack of appropriate policies and procedures can open the organization to a host of unwanted consequences. For example, the US government has established numerous laws that regulate how one can do business from a human resources perspective. The Americans with Disabilities Act (ADA) prohibits organizations from discriminating against either applicants or employees on the basis of a disability, and requires them to make reasonable accommodations for people who could otherwise do the job. (For example, a person in a wheelchair who could not reach the top shelf in the stock room could not be rejected from employment based on this fact if it was possible to provide him or her with a tool that would allow items on the top shelf to be reached.)

Similarly, the Age Discrimination in Employment Act (ADEA) makes it illegal to discriminate against applicants or employees over the age of forty on the basis of their age. (For example, if a twenty-five-year-old and a fifty-year-old both applied for the same job, it would be illegal to not hire the older person merely on the basis of age if all other qualifications, salary requirements, etc. of the two applicants were the same.) Title VII of the 1964 Civil Rights Act makes it illegal for employers to discriminate against persons on the basis of race, color, religion, gender, or national origin. This law covers human resource policies and practices related to hiring, compensation, terms or conditions, and privileges. Without defensible human resource policies and practices in place, the emerging firm could find itself in a position where it could be challenged in court over its human resource actions.

Applications

Human Resources Essentials for Emerging Organizations. One of the foundations of a successful organization is strategic planning. The need for strategic planning is no less important in the human resources arena than it is in other areas of the organization. If, for example, a company producing computer software decides that it wants to increase its share of the business application software market, analysis and planning may show that the best way to do this is to offer a new product line. As part of the planning process, the human resource system must determine how it will provide the necessary talent to turn this vision into a reality and how the organization will compensate the new employees for their performance.

Planning for human resources comprises many activities, including objectively examining the goals and plans of the organization, as well as the talents of the people within it, to determine what employee knowledge, skills, and abilities will be needed in the future. Analysis and planning allow the development of action plans for how to change the makeup of the current employee talent pool in order to meet the company's needs for the future. This change can be facilitated through the hiring of new employees to meet the needs of new or expanded product lines or projects, or the training of current employees so that they can meet the future demands of the growing company. Human resource planning also involves a consideration of the other functions of human resources, including what characteristics new employees need to possess to best support the organizational mission, how it can be fairly determined whether or not potential employees have the necessary characteristics for this purpose, what fair compensation is for the new jobs and how that fits within the budget, and how and when employees should be evaluated in order to most effectively encourage them to maximize their performance.

Once the organization determines what type of human resources environment it needs, the next step is to recruit, hire, and place qualified individuals in these positions. This function of the human resource system includes performing the necessary empirical research and developing objective tools (e.g., job descriptions, assessment tests, structured interview questions) to perform these actions not only fairly, but in a way that will maximize the fit between the resources of the employee and the needs of the organization. The human resource system is also responsible for training and developing new and current employees in an effort to increase their skill sets, levels of performance, and the contributions they make to the organization. In high-performing organizations, the contributions of the individual employee are rewarded fairly with wages, compensation, perquisites ("perks"), and other rewards for performance given on an equitable basis directly attributable to performance rather than non-job-related characteristics. A good human resource system is also concerned with the fair and equitable treatment of all employees and in improving their interactions with each other and the organization as a whole.

Practical Considerations for Implementing a Human Resources System. One can, of course, implement human resource policies and procedures with a minimum of effort. Considering the fact that most emerging businesses have a limited budget, this may initially seem like a good idea. Books, software, and websites abound that tell one how to write a personnel manual in a few easy steps. Model job descriptions or generic performance rating forms are available at low cost.

However, each organization is different from its competitors, and each employee is different from the person with whom he or she shares an office space, so the personnel policies and procedures of each company must take these differences into account and cater to the needs and goals of the particular organization. Although looking at the way another organization implements its human resource system can give one ideas to help form one’s own plans, policies, and procedures, the importance of human resource management in supporting organizational efforts for high performance is too important to be based on someone else's organization. Part of developing and implementing the best human resource plans for an organization is to start with the strategic plan of the organization. Using this information as a starting point, one can then empirically determine the human resource needs of the organization. One of the cornerstones of gathering this information is detailed, empirically based job analyses.

A job analysis is the systematic study of a job and all its various components. A good job analysis should be behavior-centered; describing the type of behavior the employee is expected to display. (For example, rather than saying a sales clerk needs a "nice personality," a job analysis would collect information about the specific behaviors that define what a "nice personality" is: "is courteous to customers," "solves customer problems without becoming angry," etc.) A good job analysis also breaks down the tasks of the job to determine what knowledge skills, abilities, or other characteristics an employee needs in order to do it well. Breaking down information about the job to this level is important because job analysis data is used to show the job-relatedness of personnel decisions. If a hiring, firing, compensation, or any other personnel decision is made on non-objective opinion that cannot be traced back to the specific requirements of the job, the decision can be challenged through formal or even legal means. The results of a behavior-based job analysis provide the organization with the logical, empirical information necessary to support personnel decisions by providing a structure for determining the job-relatedness of these decisions.

Job analysis seeks to discover the exact nature of the job, including its features, the employee behaviors demanded by the job, and how these behaviors can be observed and measured. Job analysis uses a systematic approach to data collection, primarily using data collected from observation. This information results in a record stating what tasks the employee does, how the employee does these tasks, and why the employee does them. This information helps to demonstrate the job-relatedness of various job activities. Based on this data, human resources personnel can develop a valid and reliable selection of tests to be used in making job-related decisions regarding the hiring and placement of new employees and job-related promotion and transfer decisions, developing performance appraisal instruments that are related to both the employee's performance and its relation to the goals of the organization, fairly and equitably performing wage and salary administration, and linking rewards with employee performance.

One of the reasons it is important to do a thorough and objective job analysis is to help ensure that human resources policies and procedures are fair. This issue has both legal implications as well as ethical ones. As discussed above, there are a number of federal laws in place that require employers not to discriminate on the basis of various non-job-related characteristics such as race, color, religion, sex, or national origin (Title VII), age when one is over forty (ADEA), or disability (ADA). Similarly, the Equal Pay Act of 1963 requires that equal pay be given for equal work regardless of gender. Other laws require that various types of businesses take steps to hire various types of people that may be underrepresented in the workplace (for affirmative action) as well as making sexual harassment in the workplace—actions taken on the basis of sex that significantly interfere with an employee's performance or create a hostile, intimidating, or offensive work environment—both illegal and actionable. These and other laws affecting human resources policies and procedures need to be taken into account when setting up a human resource system.

The reason for these and similar laws governing workplace human resource policies is to encourage an ethical workplace where employees are treated fairly and valued according to the job they do rather than on irrelevant characteristics. Good human resource policies and practices encourage and support employees in becoming all they can become within the context of the workplace and reward them for contributing to the goals of the organization. Good human resource policies and practices are also fair, giving equal treatment to all employees in the organization. Such practices help make an organization a good place to work, and encourage employees to become high performers that contribute to the success of the organization.

Human Resources Help for Emerging Organizations. Established organizations typically have at least one human resources person on staff to take care of the company's human resource system. However, emerging businesses—whether they are in the start-up or growth phase—often do not have the budget or the need for a full-time person to perform these tasks. As with the design of the system itself, the solution to the problem of how to implement an affordable human resources system that meets the needs of the organization will differ from company to company. However, small businesses that need to set up a human resource system have a number of resources available to help them set up a working, valid system. The choice of which resources to invest in will depend on the needs of the organization and the quality of the resources.

For emerging businesses that are just beginning to set up a human resource system, there are two issues to be considered. First, the organization needs to gather the empirical data necessary to form the basis of objective standards that can be used in the development of performance-based job descriptions, valid and reliable selection tests for use in hiring, and performance appraisal instruments. These tools can be developed in-house, but they require training and skill in order to be developed in a way that allows human resource decisions to be made fairly and equitably and to meet the legal standards for such instruments. Frequently, small or emerging businesses do not have the necessary financial resources to hire someone to do this on a full-time basis.

To solve this problem, some small firms delegate human resources activities to someone already working in the firm. For example, the company accountant may be delegated to the human resource tasks because they involve questions of payroll and compensation, and the accountant is familiar with financial matters. However, this is an unwise approach. The creation of a human resources system from scratch requires training in such activities as how to perform an empirically based job analysis and how to develop valid and reliable assessment tools. Good human resource experts also need to be educated in the application of personnel law and how to deal with employee relations issues. Such activities require special training and cannot be delegated to someone untrained in these areas or who is already fully employed with another job in the company.

There are software packages available that will help one through the process of developing some of the tools mentioned above. However, such software packages can only address general issues in the development of such instruments. Generic software packages simply cannot provide the same quality of expertise as a trained expert who is educated and experienced in human resources issues and who can observe and analyze the jobs within the organization first-hand. As discussed above, before developing a job analysis, performance appraisal system, or other instrument to be used as a part of the human resources system, a thorough, empirically based job analysis needs to be performed. It is unlikely that a software package will be able to provide the type of expertise necessary to do this.

Another option available to the emerging firm is to hire a consultant to develop the tools and set up the human resource system. Consultants are available who can perform rigorous job analyses and develop empirically based job descriptions, validated assessment tests to be used in the hiring process, and performance appraisal instruments based on objective, measurable standards of success. Typically, the consultants who do such work for a company can also provide the training necessary for managers to use the tools effectively. Consultants can also be hired to develop and implement fair and equitable compensation packages, set up payroll software, or write personnel manuals delineating human resource policies and practices for the company. Once this initial analytical and developmental work is done, the emerging firm may be able to handle the ongoing human resource functions itself. Human resource information system (HRIS) software can then help automate repetitive or quantitative functions and manage human resource data. These are available in affordable versions for small businesses. In addition, companies are available that will consult on human resources issues for a retainer at a much lower rate than it would take to hire a full-time human resources person.

The development and implementation of a valid and fair human resources system goes a long way to helping an organization—whether it is emerging or established—to thrive. Although human resource systems are just as necessary in small, emerging businesses as they are in large, established businesses, they do not necessarily require the outlay of a great deal of capital or the hiring of a full-time staff. As the company continues to grow, the human resource system can grow along with it in a way that continues to support its success.

Terms & Concepts

Compensation: Wages and other financial considerations given to the employee in return for their work.

Empirical: Type of theory or evidence that is derived from, or based on, observation or experiment.

Growth Phase: The phase in an organization's life cycle after it has successfully entered the marketplace and is in the process of increasing its market share or the scope of its business enterprises.

Human Resources: In general, human resources are any personnel employed by an organization. The field of study related to recruiting and managing the organization's personnel. A good human resources system needs to consider, at a minimum, human resource planning; recruitment, hiring, and placement; training and development; wages, compensation, and perquisites ("perks"); and employee relations.

Job Analysis: The systematic, empirical process of determining the exact nature of a job, including the tasks and duties to be done; the knowledge, skills and abilities necessary to adequately perform these; and the criteria that distinguish between acceptable and unacceptable performance. The results of a job analysis are typically used in writing job descriptions and setting standards for use in performance appraisals.

Performance Appraisal: The process of evaluating an employee's work performance and providing feedback on how well he or she is doing (typically against some standard of performance for that job).

Perquisites ("perks"): Something given to the employee in return for work over and above regular pay or compensation. Perks may include such things as health insurance, a company car, or a private office.

Reliability: The degree to which a psychological test or assessment instrument consistently measures what it is intended to measure. An assessment instrument cannot be valid unless it is reliable.

Start-Up Phase: The phase in an organization's life cycle when it first begins operation and enters the marketplace.

Strategic Planning: The process of determining the long-term goals of an organization and developing a plan to use the company's resources — including materials and personnel — in reaching these goals.

Validity: The degree to which a psychological test or assessment instrument accurately measures what it is intended to measure.

Bibliography

Dessler, G. (2013). Human resource management (13th ed.). Boston: Pearson/Prentice Hall.

McShane, S. L., & Von Glinow, M. A. (2008). Organizationalbehavior: Emerging realities for the workplace revolution (4th ed.). Boston: McGraw-Hill/Irwin.

Melton, E. K., & Meier, K. J. (2017). For the want of a nail: The interaction of managerial capacity and human resource management on organizational performance. Public Administration Review, 77(1), 118–130. Retrieved February 12, 2018 from EBSCO Online Database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=120437187&site=ehost-live&scope=site

Messersmith, J. G., & Wales, W. J. (2013). Entrepreneurial orientation and performance in young firms: The role of human resource management. International Small Business Journal, 31, 115–136. Retrieved November 20, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=85713275

Ming-Chu, Y. (2013). The influence of high-performance human resource practices on entrepreneurial performance: The perspective of entrepreneurial theory. International Journal of Organizational Innovation, 6, 15–33. Retrieved November 20, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=90515790

Savitz, E. (2012, April 9). The three things startup founders needs to know about HR. Forbes.com, 40. Retrieved November 20, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=74693421

Stillman, R. J. (1983). Small business management: How to start and stay in business. Boston: Little, Brown and Company.

Suggested Reading

Dong, L., Yaping, G., Jing, Z., & Jia-Chi, H. (2017). Human resource systems, employee creativity, and firm innovation: The moderating role of firm ownership. Academy of Management Journal, 60(3), 1164–1188. Retrieved February 12, 2018, from EBSCO Online Database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=123859617&site=ehost-live&scope=site

Flamholtz, E. G. (1986). How to make the transition from an entrepreneurship to a professionally managed firm. San Francisco: Jossey-Bass Publishers.

Gangemi, R. A., & Fenn, D. (1995, April). FMLA? ADA? OSHA? Help! Inc., 17, 112. Retrieved March 29, 2007, from EBSCO Online Database Business Source Complete http://web.ebscohost.com/ehost/detail?vid=23&hid=19&sid=6c11f73f-cb64-441f-8ccf-a2a8b38d1861%40sessionmgr104.

Paskin, J. (2013, March 22). Brogrammers making sex jokes and other reasons startups need HR departments. Businessweek.com, 7. Retrieved November 20, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=86435562

Young, G. (2004, June 17). How to … implement a new HR system. People Management, 10, 40–41. Retrieved March 29, 2007, from EBSCO Online Database Business Source Complete http://web.ebscohost.com/ehost/detail?vid=13&hid=12&sid=6c11f73f-cb64-441f-8ccf-a2a8b38d1861%40sessionmgr104.