The Impact of Human Resource Management and Work Climate on Organizational Performance

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PERSONNEL PSYCHOLOGY 2003, 56, 383-404

The Impact of Human Resource Management and Work Climate on Organizational Performance Garry A. Gelade Business Analytic Ltd Mark Ivery Lloyds TSB

Abstract This paper examines relationships between human resource management (HRM), work climate and organizational performance in the branch network of a retail bank. It extends previous research on group-level climate-performance and HRM-performance relationships and examines how climate and HRM function as joint antecedents of business unit performance. Significant correlations are found between work climate, human resource practices, and business performance. The results show that the correlations between climate and performance cannot be explained by their common dependence on HRM factors, and that the data are consistent with a mediation model in which the effects of HRM practices on business performance are partially mediated by work climate.

Few organizations can evaluate their performance accurately by averaging the performance of their employees. In most cases, the performance of an organization is determined by the productivity and efficiency of such higher-level organizational entities as departments, retail outlets, plants, or teams. In the language of operations research, these productive entities are called 'decision-making units' (DMU's). DMU's can be compared with each other when they consume the same type of resources and produce the same type of outputs. Examples of DMU's within an organization are branches of a bank, stores in a retail chain, or assembly lines in a factory. At a higher level, whole organizations in the same industry can also be treated as DMU's. Despite the practical importance of DMU performance for managing organizations, research on the psychology of work effectiveness has historically been focused on performance outcomes at the individual employee, rather than at the DMU, level. Thus in a recent meta-analysis of job attitudes and performance, Judge, Thoreson, Bono

and Patton (2001) were able to locate 1,008 individual level studies. Although there can be little doubt that high levels of individual effectiveness are an essential component of superior DMU performance, it is nevertheless clear that a description limited to the individual level is incomplete. Many types of organizational behaviour (e.g. social loafing Shepperd, 1993), and many indicators of organizational performance (e.g. customer satisfaction) exist only at the group level and have no obvious equivalent at the individual level. Nor can the antecedents of effective group-level performance be inferred solely from individual level antecedents. Consider for example a sales outlet whose customers and whose employees have either Spanish or English as their native language. Under a bonus scheme that rewards individual sales performance, an Englishspeaking salesperson may be tempted to close a sale with a Spanish-speaking customer to increase their bonus, instead of passing the customer to a Spanish-speaking colleague who might have a


PERSONNEL PSYCHOLOGY 2003, 56, 383-404 better chance of making the sale. In this example, an incentive scheme that may be highly effective for individual sales-people working on their own serves to depress performance at the DMU level. It seems reasonable to suppose that DMU performance is a function both of individual employee performance, and the higher-level context in which the jobs are done. However, relatively little is known about DMU performance and its antecedents, and both Ostroff (1992, p. 969), and Ryan, Schmit, and Johnson (1996, p. 878) have argued for more research at this level of analysis. To date, two broad strands of empirical research have emerged. First, a number of researchers have found links between psychological measures of the work environment (climate, perceptions, attitudes, satisfaction), and performance at the DMU level. For example, Ostroff (1992) demonstrated...
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