The Organizational Context and Performance Implications of Human Capital Investment Variability

Abstract

In contrast to the traditional focus of HRD on human capital accumulations we examine the issue of variability in human capital investment. Drawing on Real Options Theory, we theorize that larger firms and firms that are faced with greater organizational risk will create a greater number of options in terms of human capital investment decisions resulting over time in greater variability in labor costs. Based on a large sample of U.S. firms and longitudinal data, we found that labor cost variability was positively related to organizational risk and firm size, but negatively related to capital intensity. These relationships were significant even after controlling for employment variability. Overall, we found that in the long term, firms with greater variability in labor costs achieved better performance. Implications for strategic HRD theory and practice are discussed.

Work cost impact analysis in FTSE MIB companies

“…This is supported by the literature, which emphasises the role of human resources in generating turnover and value (Airoldi et al, 1994;Brusa et al, 1996 andLaursen and Mahnke, 2000;Wilkinson, 2000;Ham and Kleimer, 2002;Bresciani et al, 2012;Scagnelli, 2009 andGabrielli and Profili, 2012;Neirotti and Paolucci, 2013;Bhattacharya et al, 2014). Such a correlation should be more prominent in those economic sectors with high levels of labour.…”

“…This correlation is higher for those sectors characterized by high market demand, such as food and drink, oil and natural gas and travel and leisure. As other scholars affirmed (Laursen and Mahnke, 2000;Wilkinson, 2000;Ham and Kleimer, 2002;Bresciani et al, 2012;Neirotti and Paolucci, 2013;Bhattacharya et al, 2014), human resources structure and strategies impact on generating turnover and value for the company; in addition, the human element role is influenced by different economic sectors, due to their different importance of labour costs.…”

Preserving employee capabilities in economic turbulence

“…Strategic flexibility has been found to be important in economic turbulence and uncertainty (Ketkar & Sett, ; Trigeorgis & Reuer, ), in particular strategic HR flexibility (Beltrán‐Martín & Roca‐Puig, ; Brady & Briody, ; Camps, Oltra, Aldás‐Manzano, Buenaventura‐Vera, & Torres‐Carballo, ; Lepak, Bartol, & Erhardt, ). HR flexibility has been significantly attributed to improving organisational financial performance (Bhattacharya, Doty, & Garavan, ) and is defined from a perspective of employee skill and behavioural flexibility. A wide range of employee skills contributes to flexibility, and this flexibility can be accomplished by having either a smaller number of employees with broad‐based skills or a larger number of employees with narrower, more specialist skills (Bhattacharya et al, ).…”

“…For example, real option theory thinking, as a conceptual framework in strategic management, has been applied across numerous areas, such as entrepreneurship (Lee, Peng, & Barney, ), foreign direct investment (Kogut & Kulatilaka, ), research and joint ventures, and M&As (Lukas, Reuer, & Welling, ). More recently, real option theory has begun to be applied in studies associated with HR, for example, to justify investment in performance management (Maley & Kramar, ), employee skill flexibility (Bhattacharya et al, ), employee capability investment variability (Bhattacharya et al, ), temporary work contracts (Brady & Briody, ), the evaluation of the cost of redundancy (Perufo, Ozório, Bastian‐Pinto, & De Barros, ), and analysis of the best types of training in stable environments (Heckman, Lochner, & Todd, ).…”

Using a portfolio‐based process to develop agility among employees

“…The fast‐moving environment in which many organizations operate requires that they rethink their Human Resource Development (HRD) strategies (e.g., Bhattacharya, Harold Doty, & Garavan, ; Mooghali, Ghorbani, & Emami, ; Nijhof, ; Nijssen & Paauwe, ; Paauwe & Richardson, ; Right Management, ; Werner, ). HRD can play a crucial role in assisting organizational survival in fast‐changing conditions (e.g., Russ‐Eft, Watkins, Marsick, Jacobs, & McLean, ; Wright, Cropanzano, & Bonett, ).…”