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"The Underpinning Theories of Human Resource Management" Course:

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Assignment Title:

“The Underpinning Theories of Human

Resource Management”

Instructor: Prof. George O. Tasie

Course: Advance Human Resource Management

Prepared by:

Shanaz Taha Ahmed (ID: 02-19-00091)

Submitted Date: 6th January 2020

Discuss and argue the following underpinning theories of HRM:

1. Organization behavior theory

2. Motivation theory

3. AMO (Ability, Motivation, Opportunity) to participate

4. Human capital theory

5. Resources-based theory

6. Institutional theory

7. Transaction costs theory

8. Agency theory

9. Contingency theory

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Table of Contents

Chapter One: Introduction ............................................................................................ 4

Chapter Two: Conceptual Framework ......................................................................... 6

2.1 Underpinning Theories of HRM ................................................................................ 6

2.1.1 Organization behavior theory ................................................................................. 6

2.1.2 Motivation theory ................................................................................................... 7

2.1.3 AMO (Ability, Motivation, Opportunity) to participate .............................................. 8

2.1.4 Human capital theory .......................................................................................... 10

2.1.5 Resources-based theory ...................................................................................... 11

2.1.6 Institutional theory ................................................................................................ 12

2.1.7 Transaction costs theory ...................................................................................... 13

2.1.8 Agency theory ...................................................................................................... 14

2.1.9 Contingency theory .............................................................................................. 15

Chapter Three: Conclusion and Recommendation .................................................. 17

3.1 Conclusion .............................................................................................................. 17

3.2 Recommendation .................................................................................................... 18

References list ............................................................................................................. 19

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 Chapter One: Introduction

Human resource management (HRM) is a critical field of study, well-recognized,

and high-value activity. HRM is the effective and efficient use of workers to accomplish

the organization's objectives, and it is about handling coworkers, being the human side

of business administration with strategies, practices, laws and processes that influence

the organization's workers (Arulrajah & Opatha, 2016, p. 153).

A theory is a collection of interrelated concepts, factors, interpretations and premises

which presents a systematic view of phenomena by defining the relationship between

variables in order to explain a natural phenomenon. There have been various reasons

why workers leave one company for another, based on some researches it shows that

many of these causes include recruiting practices, lack of a fair compensation scheme,

style of management, bad working conditions, job insecurity, dissatisfaction of job,

insufficient incentives for training and development. Such causes can usually be

categorized as motivational factors that are intrinsic and extrinsic. Management must not

rely completely on intrinsic variables to affect employee retention when evaluating an

effective strategy to keep an employee in an organization; instead, it must include both

extrinsic and intrinsic variables (Almaaitah et al., 2017, p. 21). The main reason of

retention is to keep the employees and prevent their leaving as this could have an adverse

effect on productivity and profitability (Samuel & Chipunza, 2009, p. 411). Employees in

any organizational firms always need a reward or any compensation to be motivated and

to be able to perform well, so that organizations should be able to set a comfortable

environment for their workers (Almaaitah et al., 2017, p. 25).

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 On the other hand, the theories of management are the collection of general rules

which guide managers in managing an organization. Theories are also a justification for

encouraging workers by responding effectively to business goals and to incorporate

successful means of achieving the same. Management theories are principles around

proposed management strategies that may include methods such as structures and

guidelines that can be applied in modern organizations. Professionals usually will not rely

solely on one management theory, but will instead incorporate multiple principles from

various management theories that best match their employees and corporate culture.

This paper will discuss the main theories that underpinning on the HRM and its functions

in any organization.

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 Chapter Two: Conceptual Framework

2.1 Underpinning Theories of HRM

Many researchers attempted to design a name for the HRM theories, this section

describes nine important theories which support HRM policy and practices in any

organization.

2.1.1 Organization Behavior Theory

The study of organizational behavior (OB) is applied to HRM functions and its

related subjects helps us understand what people in organizational environments think,

feel and do. This knowledge helps to anticipate, recognize and monitor organizational

events for HR and, realistically all employees. Organizational behavior study includes

research areas dedicated to improving performance at work, increasing job stability,

fostering creativity, and fostering leadership. A focus on organizational behavior helps to

explain why certain different behaviors impact workers ' efficiency and discretionary effort,

as well as how to consider and forecast the effects of different policies on managing

human resources (Pfeffer, 2007, p.126-127).

There are several important aspects from the viewpoint of organizational behavior that

Pfeffer in (2007) illustrated three: First, people are social beings and as such are

concerned with their interactions with one another and affected by what others say and

do. Secondly, people are worried with equality and justice, both the distributive results

and the mechanisms by which those results are decided. Because of this equal role in

both systems and results, people will be gradually known as economists, in reality, spend

money to "punish" people who violate fairness standards. Thirdly, organizations as

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entities are also embedded in a social context and are influenced and imitated by the

other organizations, partly in order to achieve validity by acting like or look like others and

partly in accordance with social expectations and standards.

So, organizational behavior is an area of study that examines the impact those human

beings, groups and structures have on behavior within organizations in order to apply this

knowledge to improve the effectiveness of an organization.

2.1.2 Motivation Theory

Motivation is a way to create a high amount of passion in order to achieve

organizational goals, and this condition is addressed by fulfilling certain individual needs.

As Haque, Haque and Islam (2014) stated that managers within businesses or

organizations are largely responsible for ensuring that the activities or roles are conducted

in the right way by workers. To accomplish that, these HRM must guarantee that they

have a professional team of workers to hire the best staff capable of doing the job. To

optimize the productivity of the employees, the employee needs to be motivated enough.

At this level, one must understand human nature better understand how motivation can

impact on the performance of the employee. To achieve this goal, it is important to

combine the correct motivational resources with successful management and leadership

in as much as motivation impacts on employee performance (Haque, Haque & Islam,

2014).

Not to ignore the idea that motivation is quite important in determining the skill of

the employee, so do other variables like the resources provided to an employee to do

their job. Successful work output may therefore emerge from a variety of motives. It

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provides an ambiguity in the discussion as performance and motivation varies from

individual to individual and from industry to industry. This therefore gives rise to more

critical analytical thought in the subject area. In this context, several academic literatures

from scholars and practitioners have ensured that this fascinating academic area can be

resolved on how motivation can improve performance (Haque, Haque & Islam, 2014).

Observations indicate that workers who are well motivated are more productive and

creative in achieving business or organizational goals. On the other hand, less motivated

workers are less productive and appear to deviate from the accomplishment of

organizational goals. Motivation as incentive programs is essential for capacity building

and capacity translation into higher performance (William, 2010, p. 2).

2.1.3 AMO theory (Ability, motivation and opportunity) to participate

According to AMO theory the components of Ability, Motivation, and Opportunity

are the three-independent work-system elements that form employee characteristics and

eventually lead to organizational success. Through these three components,

organizational interests are best served due to the fact that AMO theory paves the way

for line managers to use effective approaches that result in employee motivation using

HR policies and practices (Bos-Nehles, Riemsdijk, & Looise, 2013, p. 3). Firstly, Ability

refers to those practices and policies that HR undertakes to ensure that employees have

or gain the required skills, knowledge and ability to perform their tasks with minimum

supervision as Yahya, Tan and Tay (2017) states that ability-enhancing HRM practices

are the practices that increase the employee’s abilities and competencies to achieve

organizational goals. On the other hand, ability enhancing practices also refer to those

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practices that are taken to ensure effective recruitment and selection process to hire the

right employees who have the right skills for the role requirements. In addition to

recruitment and selection ability-enhancing HRM practices cover training and

development practices as well, which provide employees with the necessary skills and

knowledge to perform tasks )Yahya, Tan & Tay, 2017, p. 549).

Secondly, motivation refers to employee performance, amendment polices

performed by HR to manage motivation in the organization. It also refers to the ways in

which the employees are motivated to put more and extra efforts in performing assigned

tasks mainly by rewarding them for the efforts they have already put in their jobs

“motivation enhancing HRM practice within the organizations to perform better which

included contingent rewards and performance management” (Yahya, Tan & Tay, 2017,

p. 540). Motivation enhancing practices can be performed in different forms, for example

an organization can increase motivation through communicating performance feedback

to their employees or through providing them with financial rewards.

The last component is the opportunity-enhancing HRM practices which aim at

engaging employee involvement through providing opportunities. According to Bello-

Pintado (2015) cited in Yahya, Tan, & Tay, 2017, p. 550) opportunities-enhancing HRM

practices are referred to as the practices that delegate decision making authority and

responsibility from top level hierarchy to lower level hierarchy through information sharing.

This practice strengths employee trust in the organization and it fastens organization

growth through collective work (Bos-Nehles, Riemsdijk, & Looise, 2013).

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2.1.4 Human Capital Theory:

Human capital is an illustration of people’s investment in themselves, in other word

in their skills, that eventually increases their economic productivity. Their theory is based

on the idea that human capital leads to creativity which eventually results in receiving

higher personal income. This theory’s supporters believe that educated people are

productive people meaning people who are educated, earn higher personal income than

the rest of the population. “Human capital theory rests on the assumption that formal

education is highly instrumental and even necessary to increase production capacity of a

population” (Olanyan & Okemakinde, 2008, p. 479).

However, there are some researchers who stand against the human capital theory,

such as Fix, Blair (2018) they suggest that the correlation between income and education

is weak. “Simple correlations between earnings and years of schooling are quite weak.

Moreover, in multiple regressions when variables correlated with schooling are added,

the regression coefficient of schooling is very small” (Mincer, 1974 stated in Fix, 2018, p.

21).

Human capital theorists claim that productivity and efficiency of employees

increases by education through raising the level of cognitive stock of economically

productive human ability that is an outcome of innate capability and investment in human

beings. According to Babalola (2003) stated in Olanyan and Okemakinde (2008) the logic

behind investing in human capital is built on three points of view which are first, the new

generation must be provided with the knowledge that previous generations also had.

Second, the new generation should be trained in the ways in which the existing knowledge

can be used to develop and invent different products or social services. Third, the new

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generation should be encouraged to discover entirely new approaches in fulfilling the

community’s needs through creative approaches.

2.1.5 Resource-based Theory

The resource-based view is applied as a theoretical foundation in HRM that is based

on the assumptions that firm resource distributed heterogeneously and remained stable

over time. A firm’s resources include materials, skills, organizational processes and

systems, plus information and data of the organization. This theory ties HRM with

competitive advantage generation through focusing on fostering the internal resources

that the organization owns which most probably are unique and special to the firm, in

different words no two organizations have the same exact resources, either tangible or

intangible. “If resources and capabilities of a firm are mixed and deployed in a proper way,

they can create competitive advantage for the firm. Eventually, only companies

themselves can achieve and sustain competitive advantage by innovation and

strategically positioning in the market” (Mweru & Muya, 2015, p. 217). However, theorists

argue that effective human resource practices can easily be copied by other competitors

while the type human capital an organization has cannot be copied which ultimately turns

into competitive advantage for the firm.

Theorists distinguish between resources and capabilities arguing that sources are

the inputs in the production process that are the fundamentals of analysis. According to

Grant (1999) researchers face some problems in identifying the resource basis for

specific organizations due to the fact that the two main sources of data and information

which are IT and financial statements and both of those factors fail to provide adequate

information about intangible resources and people-based skills and only provide a

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fragmented picture of resource bases. In order to find a tactic to identify resources a

classification approach is produced that consist of six categories of resources which are

financial resources, physical resources, human resources, technological resources,

reputation and organizational resources.

2.1.6 Institution theory

Institution theory suggests that the environment inside the organization has a direct

impact on formal organizational structure development. The organizational environment

features such as cultural elements, symbols, normative beliefs, and other shape

institutional structure. According to Meyer and Rowan (1977) cited in Mohamed (2017)

argued that organizational forms depend on “rational myths‟ or shared beliefs. Through

the Institutional theory theorists explain the logic of organizational fields and

organizational norms and argue that after conforming these norms, organizations become

optimal and prolong their survival by putting these norms into practice finally grantees

organizational survival.

However, one of institutional theory’s main contributions is managing the

organizational research in its cultural cognitive dimension (Scott, 2008 cited in Mohamed,

2017), researchers have focused on regulatory and normative aspects (Phillips and

Malhotra, 2008 cited in Mohamed, 2017, p. 152) that create stability by allowing deviating

behavior in the organizations.

It is argued that there are three different institutionalisms. Starting with sociological

intuitionalism which has three main stages. Firstly, instruments that consist of individual

ideas and assumptions. Secondly, the linkage between observed reality and political

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instruments and policy goals. Thirdly, culturally driven assumptions. The second form of

intuitionalism is historical institutionalism which has a moderately high level of self-identity

(Ramsey & Amenta, 2009, p. 3). The last element is political institutionalists typically

situate their claims at the state or macro-political level and argue that the process of

formation of states, political systems, and political party systems strongly influence

political processes and outcomes.

2.1.7 Transaction Cost Theory

Transaction cost theory is one of the important organizational theories for the

analysis strategy and organizational issue and recently it has been applied to the HRM

functions for controlling employee’s behavior, which focuses on examining the problem

of human exchange (contract) based on finance and economics. For the HR department

this theory is about understanding the employee’s contract (Wright & McMahan, 1992, p.

308). Transaction cost theory is used for solving opportunism and rationality in the

contract. Firstly, Opportunism means a contract between parties behave as self- interest,

a firm must provide safeguards in the contract as guarantee to be sure that the parties

will not tend to act in self-interest. Secondly, rationality means that the contract has no

enough information and disable company to make the right decision because the lack of

adequate information (Williamson, 1994, P. 81).

However, As Suska (2016) mentioned that the transaction cost divided into three

types; Marking transaction costs are the costs of collecting information, conducting

decision making about an agreement, and the cost of implementation of the contract. The

inter-company transaction costs are the fixed and the variable costs of the company’s

practices. The last one is public transaction costs, which are the costs of organizing and

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maintaining public order. Therefore, firms through marking transaction cost can reduce

the cost of searching for the qualified applicant by providing enough information about the

vacancies, checking the application documents, references, and negotiation about

contracts (Suska, 2016, p. 259).

Transaction cost theory is quite useful for describing employee motivation at the

individual, group and organizational level. The theory linked to compensation system and

provide adequate rewards for employee’s performance (Jones, 1984 quoted in Wright &

McMahan, 1992, p. 309- 310). Also, the transaction cost theory helps to arise the contract

implementation if any gaps, errors, unanticipated disturbances occurred between the

parties.

2.1.8 Agency Theory

Agency theory uses to understand situations in which a principal (owner) delegate

tasks to an agent (employees) on his behalf include some decision-making authority. This

theory applied to HRM by reducing the conflicts of interest between principal and agents

when responsibility delegated by controlling behaviors and build employee relations. As

Welbourne and Cyr (1996) noted that agency cost will reduce when the firm is controlled

by the owner and conflict of interest eliminated and establish proper incentives to ensure

that the agent will not take harmful action toward principal. Agency cost includes

monitoring cost which directly related to the actions of the agent. Firms managing and

monitoring by owner required low agency cost, but when the firm grows and more agents

involve, the monitoring cost increase because owner becomes less efficient.

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 Nevertheless, the agency theory has extensive consequences at both the individual

and organizational level for firms, because it linked between goals and participation, tied

employee attitudes, organize the relationship between employer and employees, and

employee withdraws behaviors (Levy and Williams, 2004 quoted in Evans & Tourish,

2016, p. 6). Also, Welbourne and Cyr mentioned in their article that, the HRM functions

such as job analysis, job posting, writing and formalizing policy which made for the

purpose of standardizing and control employee behavior may viewed as serving

monitoring function by managers. Firms can get benefit from choosing incentive

alignment by increasing employee ownership (Welbourne and Cyr, 1996, p. 8). This

focusing on aligning employee goals with organization goals and makes employee

become risk-taker and behave in the interest of the principal benefit. Also, provide

rewards to employees when performance improved.

2.1.9 Contingency Theory

This theory suggested that in order firms to be effective, HRM functions must fit

with the organization or external environment aspects to achieve organizational goals.

According to Harney (2016) said that contingency theory within HRM is based on external

and internal fit. External fit means HR practices must fit with the organizational strategy

and environment conditions. Internal fits mean HR practices must work together to deliver

the same message and the desired outcome. Also, Delery and Doty (1996) stated that by

using contingency theory, firms can promote employee behaviors that are matched with

business strategy because behavior is the impact of an employee’s ability and motivation,

therefore by implementing HR practices such as promoting policies which motivate the

employee, an organization can influence behavior.

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 However, contingency factors such as culture, globalization and the size of

companies have a direct influence over the HRM functions. According to Rekers (2013,

p. 25- 27) stated that as different culture implies different HR practices, when the

organization involved in a new environment which the culture is different form exist

culture, the HRM need more information to make decision, take care of changes and

maintain balance between employee’s behavior toward new environment. Globalization

is a contingent upon HR practices because the consequences of the globalization are

introducing firms to new technology, which required more training for employee and hiring

skilled labor and globalization lead to new markets which introduce to new cultures and

managing these different become very important for the HR department. Also, company

size is contingent upon HRM, because on the smaller firms, the HR department was not

existing or very small and sometime the responsibility takes by production manager while

in larger firms have a separate HR department which available for more issue and

required more HR expertise for being responsive.

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 Chapter Three: Conclusion and Recommendation

3.1 Conclusion

In conclusion, HRM is the ability to use employee’s effectively and efficiency to

achieve the organization’s goal and HRM theories helps HR to achieve this purpose and

increase the motivation and commitment of workers. In this paper discussed nine theories

which support HRM functions. The organizational behavior theory helps HRM to

understand of employee’s behavior and explain why certain different behaviors impact

employee’s performance. Motivation theory is about creating a high amount of passion

between employees to obtain the desire goals and address individual needs. The AMO

theory paves the way for line managers to use effective approaches that result in

employee motivation using HR policies and practices. Human capital theory claim that

employee education is a key important point for raising productivity. The resource-based

theory is about HRM must know about the company’s sources and capabilities that can

be used for competitive advantage. Institution theory helps HRM to anticipate about

environmental dimensions that has direct impact over organizational structure

development. The transaction costs theory focuses on examining the problem of human

exchange based on finance and economics. The agency theory is important for HRM for

solving the conflict between principal and agents. The last theory, contingency theory

focuses of HRM functions must fit with the organization or external environment aspects

to achieve organizational goals.

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3.2 Recommendation

The strategies and practices of HRM as well as its role inside the organization

are very important. But the HRM function in one organization can be applied to the

others because the differences in organizational structure and its environment. It

is important for organizations to establish best HRM practices and policies which

facilitate continuous learning process for employees and provide a flexible

environment. The success of any organization depends on the ability to learn and

the employee’s ability to achieve designed goal. The HR must understand which

theory is needed for organization development. However, human resources

management should minimize the gaps in employment relationship, monitoring,

contracts and ensuring compliance in order to motivate employees.

Page 18 of 21
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