SkillsScorecard Blog

The impact of HRM on profitability and productivity

One of the tasks we find ourselves engaged in from time to time is helping HR teams develop the business case for online performance management.

To this end, research jointly conducted by academics from the University of Sheffield and the London School of Economics on behalf of the United Kingdom’s Institute for Personnel and Development is worth highlighting.

The study, Impact of People Management Practices on Business Performance, propounds two very important propositions about HRM (Human Resource Management):

Proposition 1: That HRM practices drive profitability and productivity

The study says at page 27:

The results reveal that HRM practices taken together accounted for 19 per cent of the variation between companies in change in profitability (ie, subsequent profitability controlling for prior profitability). This is statistically significant.
When we examine change in productivity, HRM practices together account for 18 per cent of the variation between companies in the change in productivity over the time period of our study.

To assess the impact of HRM activities the project also examined the relative impact of non-HRM initiatives such as quality focus and technology.

If you accept the research methods employed, the result is clearly significant.

Proposition 2: That the acquisition and development of skills is the most significant HRM activity

The researchers included in this acquisition and development of skills bundle the following activities: selection, induction, training and appraisal.

The study goes onto say at page 28 (emphasis added):

The results reveal that acquisition and development of skills (selection, induction, training and appraisal) and job design (job variety and responsibility, skill flexibility and teamworking) are significant predictors of both change in profitability and change in productivity.

Other HR factors considered in this relative analysis can be seen in the diagram below. Interestingly, comparative pay and incentive compensation systems are much more lowly rated.


The authors go onto declare a clear link between the management of people and the performance of companies.

HRM as a predictor of performance

A very interesting aside, and possibly also part of the business case is the conclusion by the report authors that HRM practices are a far more important predictor of change in company performance that the areas of strategy, R&D, technology and quality. In fact, it is contended that it is more important than the other four factors combined!

The result of the survey is so decisive that it’s almost hard to believe. The authors contend that the basis for this finding is the wide variation in HR investment, compared to the minor difference in strategy, R&D, technology and quality areas. They argue that it is this variation of input that leads to the variation of output.

The final words should also go to the report’s authors:

Overall, the results of this study very clearly indicate the importance of people management practices in influencing company performance. The results are unique, since no similar study has been conducted, comparing the influence of different types of managerial practices upon performance. If managers wish to influence the performance of their companies, the results show that the most important area to emphasise is the management of people. This is ironic, given that our research has also demonstrated that emphasis on HRM practices is one of the most neglected areas of managerial practice within organisations. The implications we believe are clear.

It is an interesting report which you can read here.

Source: Malcolm G Patterson, Michael A West, Rebecca Lawthom and Stephen Nickell, “Impact of People Management Practices on Business Performance” in Issues in People Management, Institute for Personnel and Development, 1997