Committed Employees: a Must for Firm Performance? The Influence of Commitment-based HR Practices on Firm Performance, Mediated by Voluntary Employee Turnover and Firm Growth

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Committed Employees: a Must for Firm Performance?

The Influence of Commitment-based HR Practices on Firm Performance,

Mediated by Voluntary Employee Turnover and Firm Growth

Master thesis, MSc Human Resource Management University of Groningen, Faculty of Economics and Business

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Committed employees: a must for firm performance? 2

ABSTRACT

This research investigated the relationships between commitment-based HR practices, voluntary employee turnover, firm growth and firm performance in terms of human capital ROI. We used longitudinal data with a panel design based on 309 firms, recorded for four years. Literature in the field of strategic human resource management has shown that there exists a black box between different HR practices and firm performance. This study tries to find an answer to what extent either voluntary employee turnover and firm growth mediates that relationship. First, this study find a positive relationship between commitment-based HR practices and human capital ROI. Secondly, in contrast with our meanings, we did not find evidence for both the voluntary employee turnover and firm growth to mediate the

relationship between commitment-based HR practices and human capital ROI. Theoretical and practical implications of the results are discussed.

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Committed Employees: a Must for Firm Performance? The Influence of Commitment-based HR Practices on Firm Performance, Mediated by Voluntary Employee Turnover

and Firm Growth

According to an investigation in the United States of America, about 35 percent of the American workers leave organizations within the first six months of being hired (Branham, 2005). This study revealed also that 88 percent of these workers voluntarily leave

organizations and something besides money is the case. These workers feels devalued and unrecognized. From the firms’ perspective, increased turnover rates reduces firm performance (Park & Shaw, 2013; Hancock, Allen, Bosco, McDaniel, & Pierce, 2013). Moreover, firm-specific human capital losses significantly impact firm performance (Rauch, Frese, & Utsch, 2005; Hancock et al., 2013). According to Pfeffer (1994) and Rauch et al. (2005),

especially new and small firms are more sensitive to losses of human capital than larger firms. In addition, it is for new and small firms really difficult to attract and retain the top talented employees in contrast with larger firms (Thatcher, 1996; Carroll, Marchington, Earnshaw, & Taylor, 1999).

In the past two decades, researchers in strategic human resource management (SHRM) literature have investigated why and how organizations achieve their goals through the use of HR practices (Jiang, Lepak, Hu, & Baer, 2008). For instance, the HR practices could be the basis to build a unique source of competitive advantage of a firm (Wright, McMahan, & McWilliams, 1994). Subsequently, researchers in SHRM argued that the HR practices also can have an important effect on the organizational effectiveness, as for example by reducing voluntary employee turnover (Vandenberg, Richardson, & Eastman, 1999; Pfeiffer & Veiga, 1999). One of the types of human resource management practices are the so called

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more extensive and general skill training and higher and more extensive salaries and benefits (Arthur, 1994). Research conducted at the organizational level has theoretically and

empirically suggested that commitment-based HR systems increase firm effectiveness by reducing voluntary employee turnover (Huselid, 1995; Vandenberg et al., 1999; Pfeiffer & Vega, 1999). Voluntary employee turnover means the situation when individuals voluntarily leave organizations (Maertz & Campion, 2004). Firms that attract human resources, develop, and motivate qualified people do not want to see them leave on the short term (Cascio, 2000). Consequences of these departures have a major impact on the organization in terms of

disruptions to the normal operations of organizations. It also will result in a lower

organizational performance (Kacmar, Andrews, Van Rooy, Steilberg, & Cerrone, 2006; Park & Shaw, 2013; Hancock et al., 2013).

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of employees. In this way, we try to operationalize performance because it is central to the claim of HR: it is supposed to improve a firms’ operational efficiency (Shiri, 2012).

The purpose of this study is to develop and test a model in which voluntary employee turnover and firm growth mediates the relationship between commitment-based HR practices and firm performance. Doing so will result in several contributions to the literature. We will address whether both voluntary employee turnover and firm growth are mechanisms through which commitment-based HR practices leads to firm performance. This will help us to better understand the process that link SHRM to firm performance. Moreover, this study will address the issue of the relationship between commitment-based HR practices and firm performance. We will test these relations and effects in different industries. In the end, we are able to give advice to firms in different industries how to effectively manage their employees in relation to firm performance.

THEORY

Relationship of commitment-based HR practices and human capital ROI

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have shown that the benefits of commitment-based HR practices are to provide career development, long-term growth opportunities and to increase group motivation and social interactions (Arthur, 1994; Tsui, Porter, Pearce & Tripoli, 1997; Lepak & Snell, 1999). These HR practices encourage knowledgeable and capable employees and motivate them to socially interact while performing their day-to-day tasks (Ceylan, 2013; Tortosa-Edo, Sanchez-Garcia, & Moliner-Tena, 2010). Through these commitment-based HR practices, employees act in the best interests of their firm rather than only in their self-interest (Batt & Colvin, 2011; Collins & Smith, 2006; Rousseau, 1995). In addition, according to Tsui et al., (1997), the social exchange model plays also an important role here. The social exchange model enhance flexibility by encouraging and developing employees to adopt expandable and flexible work roles. Social exchange is related to reciprocity, meaning a situation when employers are taking care for their employees, the employees will do something good in exchange for the firm. For example, the employer offers some degree of employment security to the

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job tasks in ways that are consistent with organizational goals. This also underlines the role of commitment-based HR practices in relation to firm performance. In addition, empirical research has shown that positive employee relations affect firm performance by creating positive employee attitudes (Fulmer, Gerhart & Scott, 2003). Other research in the field of SHRM indicated that commitment-based HR practices affect firm performance by creating an organizational climate that elicit employee behaviors and capabilities that confer to firm competitive advantage (Collins & Clark, 2003; Bowen & Ostroff, 2004). In this study we focus on human capital ROI as a type of performance, including the revenues of the firm. Generally, research has shown that revenues associated with the investments in progressive HR practices are substantial (Cascio, 1991; Flamholtz, 1985; Becker & Huselid, 1998; Dyer & Reeves, 1995). Moreover, extensive research has been done about the impact of HR

practices on organizational productivity. There is a widely held belief that this link is positive (Huselid, 1995; Katz, Kochan & Keefe, 1987; Katz, Kochan & Gobeille, 1983; Bartel 1994).

Besides the research that already has been done about the relation between

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to contribute to this point. Based on this and the information above, we hypothesize that;

Hypothesis 1: There is a positive relationship between commitment-based HR practices and human capital ROI.

Relationship of commitment-based HR practices with voluntary employee turnover and firm growth

The relationship between HR practices and voluntary employee turnover has been investigated by a number of researchers in the field of SHRM (Gardner, Wright, & Moynihan, 2011). They have argued that several elements influence the link between HR practices and voluntary employee turnover. These researchers suggest that perceptions of job security, the presence of a union, compensation levels, job satisfaction, organizational tenure and the demographic variables such as age, gender and education play a role. Moreover,

organizational commitment, individual expectations of the job and the expressed intention to search for another job are predictive factors of voluntarily employee turnover (Arnold & Feldman, 1982; Cotton & Tuttle, 1986). When we also take the costs of voluntary employee turnover into account, it is a challenge for firms to retain employees (Arms, 2010).

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Subsequently, according to Arthur (1994) and Batt (2002), the commitment-based HR practices increase employee commitment and therefore, will reduce voluntary employee turnover. Based on this and the information above, we hypothesize that;

Hypothesis 2a: There is a negative relationship between commitment-based HR practices and voluntary employee turnover.

Besides voluntary employee turnover, also the relation between HR practices and firm growth has been investigated in the field of SHRM. There is a widely held belief that firms nowadays need well-designed HR practices and HR competencies to survive and create opportunities to grow in the knowledge-based global economy (Pfeffer, 1994; Darwish, Singh & Mohamed, 2013). According to Vlachos (2009), the commitment-based HR practices play an important in order to achieve that. He argued that there exists a positive relationship between commitment-based HR practices and firm growth. One of the reasons could be the social environment within organizations. Firms who are following commitment-based HR practices show a long-term investment in their workforce (Tsui et al., 1997). In that way, commitment-based HR practices will create a social environment within the firm that it motivates employees do the best they can for the firm, rather than for themselves (Rousseau, 1995). Subsequently, when employees are willing and motivated to do whatever they can for the firm, it will cause increasing organizational performances, for example in terms of growth. Moreover, firms who are utilize commitment-based HR practices are more able to retain the talented and high performing employees for the firm (Collins & Smith, 2006). Based on this and the information above, we hypothesize that;

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Relationship of voluntary employee turnover and firm growth with human capital ROI

One thing the human capital theory does, is examining the relationship between turnover and organizational performance (Shaw, Grupta, & Delery, 2005). According to the human capital theory, expenditures on training, education and socialization are regarded as an investment on human capital and could be a seen as a cost for the improvement of the

productivity (Becker, 1962). When employees who already received these resources

voluntarily leave organizations, these efforts used for the organizations return on investment in an employee will disappear. In this way, voluntary employee turnover can negatively impact organizational effectiveness (Shaw, Duffy, Johnson, & Lockhart, 2005). Especially firm-specific human capital cannot be easily replaced, even when the vacant positions are being filled with experienced employees from other organizations (Becker, 1962; Lazear, 2009). However, it is for new and small firms in the first place quite difficult to attract

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a negative relationship between voluntary employee turnover and firm performance. Based on this and the information above, we hypothesize that;

Hypothesis 3a: There is a negative relationship between voluntary employee turnover and human capital ROI.

In the literature in the field of SHRM, there is a an old-debate going on in what way firm size affects firm performance (Kimberly, 1976; Jung, 2013). An increasing firm size, in this study mentioned as firm growth, has been recognized as the number of full-time

employees within the organization (Jung, 2013). Some researchers arguing that large firms will create a lot more bureaucracy than small firms (Weber, 1947). Subsequently, according to Damanpour (1992), small firms could be more flexible and will accept and implement changes in a more easily and faster way than large firms. However, he argued that large firms will have more technical knowledge than small firms, as a consequence of having more experienced and skilled employees.

In this study, we focus on new and small firms. A number of researchers has argued that the personnel size has a positive effect in relation to organizational productivity (Brewer, 2005; Gooding & Wagner, 1985; Glisson & Martin, 1980). They concluded that employees are noted as important assets in order to accomplish organizational goals, which is more important in small firms. Based on this and the information above, we hypothesize that;

Hypothesis 3b: There is a positive relationship between firm growth and human capital ROI.

The mediating role of voluntary employee turnover and firm growth

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(2011), we mean with the ‘black box’ the problem of what chain of links actually leads from HR practices through to organizational performance. Virtually all scholars who specify a causal chain between HR practices and organizational performance argued employee attitudes and behavior as the fulcrum or critical linking mechanism (Boxall & Purcell, 2011). Two of the consequences of that behavior and attitudes could be voluntary employee turnover and firm growth, in where we can define voluntary employee turnover as the situation in which individuals voluntarily leave organizations (Meartz & Campoin, 2004), and firm growth as the increasing number of full-time employees (Jung, 2013).

There are a lot of reasons for employees to leave voluntarily organizations, but from the SHRM literature, we can analyse two major reasons. The first reason includes a low level of job satisfaction (Hellman, 1997), and the second reason can be found in better job

opportunities in the labor market (Hulin, Roznowski, & Hachiya, 1985). Satisfaction of employees has to deal with several HR perspectives, like policies, compensation and working conditions in the organization (Verma, Malhotra & Bedi, 2012). It is possible that employees start thinking about quitting and will search for better job opportunities in the labor market when they are not satisfied with their job (Mobley, 1977). According to Arms (2010), firms can take several actions to retain their employees to provide better job opportunities in order to let the firm growth. Investing in employee development, like training and education, is one option and also showing your appreciation, for instance in financial rewards and gifts, could be a good action. Furthermore, make performance reviews more meaningful and help employees with managing their workload.

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(Boorstin, 2005). It is necessary for managers to understand how organizational performance will be influenced by voluntary employee turnover before taking managerial actions to deal with turnover issues, especially to take into account the job satisfaction and job opportunities in the labor market. As mentioned earlier, it is important to make a distinction between high performers and low performers, since voluntary turnover of low performers can be gainful, in where retaining the top talented performers is just important for firms, especially for small firms. Based on this and the information above, we hypothesize that;

Hypothesis 4a: Voluntary employee turnover mediates the positive relationship between commitment-based HR practices and human capital ROI.

Hypothesis 4b: Firm growth mediates the positive relationship between commitment-based HR practices and human capital ROI.

The theoretical framework is depicted in figure 1.

--- Insert figure 1 about here ---

METHOD Sample

To test our hypotheses, we used the Kauffman Firm Survey (KFS) data for the period from 2004 till 2007. The survey is conducted in the United States of America and is a

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KFS respondents were paid $50 to complete the interview. CATI completes accounted for 3,781 (77 percent) and web completes accounted for 1,147 (23 percent) of the total

interviews. The survey is distinguished in five categories, namely business characteristics, strategy and innovation, business organization and HR benefits, business finances and work behavior and demographics. We focus in this study on the full-time employees of the organizations. In addition, we will use the categories business organization and HR benefits and business finances to develop and test a model to investigate our hypothesis. These categories include accurate information such as different aspects in relation to commitment-based HR practices like paid sick days and tuition reimbursement. The KFS data provides information for different industries. We drew from a variety of industries to conduct the analysis. We excluded firms that did not foresee in the total amount of information needed to make proper analysis. Furthermore, we excluded firms with part-time employees and firms with zero employees, since we measuring effects based on full-time employees. In the final sample, 309 respondents were included. These were firms that survived it to report complete data through their first four years of operation.

Measures

Commitment-based HR practices. We argued that commitment-based HR practices

in this study generally include a combination of practices based on employee selection practices, compensation practices, training programs and performance appraisals (Collins & Smith, 2006). Therefore, we have used the items paid sick days, paid vacation, retirement

plans and tuition reimbursement (0=no, 1=yes). These items fits well with the

commitment-based HR practices variable used in this study. The commitment-commitment-based HR practices items are dichotomous outcomes. The scales used to measure the different items can be found in

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Voluntary employee turnover. We defined voluntary employee turnover in this study

as the situation in which individuals voluntarily leave organizations (Meartz & Campoin, 2004). To measure the voluntary turnover of the employees within the organizations, we have analysed the number of full-time employees during time 3 and time 1, which is given in the KFS dataset. We coded this as the total number of employees that left the firm over the course of the first four years.

Firm growth. We assume firm growth in this study, in contrast with voluntary

employee turnover, as an increase in the number of full-time employees. We have again analysed the number of full-time employees during time 3 and time 1. We coded this as the total number of employees that the firm hired over the course of the first four years.

Human capital ROI. In this study, we have measured the human capital ROI as a

form of firm performance. To measure this variable, we divided the items of total revenue by

total wages. Both variables are measured with nine possible answers from answer 1= $500 or

less till answer 10 = $1,000,001 or more. The Cronbach’s alpha is .90.

Controls. The KFS dataset provides the possibility to control for several variables. We

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Analysis

According to Hayes (2009), variable X (commitment-based HR practices) is

postulated to exert an effect on an outcome variable Y (human capital ROI) through one or more intervening variables, sometimes called a mediator (voluntary employee turnover and firm growth). In terms of the path analysis, c’ quantifies the direct effect of X, whereas the product of a and b quantifies the indirect effect of X on Y through M. The hypotheses will be tested by using hierarchical regressions (Cohen, Cohen, West, & Aiken, 2003). In addition, the mediation effect will be tested by using a PRODCLIN test (Mallinckrodt, Abraham, Meifen & Russel, 2006).

RESULTS Correlations

The means, standard deviations and the correlations are depicted in table one. The table shows a positive non-significant correlation between commitment-based HR practices and human capital ROI (r = .07). Furthermore, the table shows that there exists a positive and significant relation between commitment-based HR practices and firm growth (r = .14, p < .05), instead of a positive non-significant relation with voluntary employee turnover (r= .02). Subsequently, firm growth correlate negative and non-significant with human capital ROI (r = -.11), just like the relation between the voluntary employee turnover and the human capital ROI (r = -.02).

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Hierarchical Regressions

Table 2 presents the hierarchical regression analyses. We have controlled for different variables, namely the NAICS codes, mean employees from time 1 till time 3 and for both the mean assets and mean debts from time 1 till time 3. Moreover, we have controlled for the other variables at time 0.

The first hypothesis was stated as a positive relationship between commitment-based HR practices and human capital ROI. According to table 2, we found a positive significant relationship (B = .25, SE = .07, p < .05). Therefore, we will confirm hypothesis 1.

Hypothesis 2a was stated as a negative relationship between the commitment-based HR practices and the voluntary employee turnover. According to table 2, in contrast with our hypothesis, it shows a non-significant and positive relationship (B = .05, SE = .06). Therefore, we will reject hypothesis 2a. Hypothesis 2b was stated as a positive relationship between the commitment-based HR practices and firm growth. As table 2 shows, this relationship is non-significant and negative (B = -.02, SE = .05). In line with that, we have to reject hypothesis 2b.

Subsequently, hypothesis 3a was formulated as a negative relationship between voluntary employee turnover and human capital ROI. Table 2 shows a non-significant

negative relation (B = -.02, SE = .06), meaning that we should reject hypothesis 3a. Moreover, hypothesis 3b was stated as a positive relationship between firm growth and human capital ROI. According to table 2, we find a non-significant positive relation (B = .12, SE = .08), so we also have to reject hypothesis 3b.

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For the mediation effect, we have calculated two hypothesis. The first one, hypothesis 4a, was stated that voluntary employee turnover mediates the positive relationship between commitment-based HR practices and human capital ROI. Table 3 shows that there exists a non-significant mediation effect of voluntary employee turnover on the relationship between commitment-based HR practices and human capital ROI (B = -.009 ). For that reason, we will reject hypothesis 4a.

Furthermore, we have calculated hypothesis 4b in a way that firm growth would mediate the positive relationship between commitment-based HR practices and human capital ROI. According to table 3, we find a non-significant mediation effect of firm growth on the relationship between commitment-based HR practices and human capital ROI (B = -.002) We also have to reject hypothesis 4b.

--- Insert table 3 about here ---

DISCUSSION Summary of results

In line with our reasoning, we found a positive and significant relationship between commitment-based HR practices and human capital ROI. In that way, we confirmed

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employee turnover and firm growth on the relationship between commitment-based HR practices and human capital was not confirmed in this study.

Theoretical implications

This study focused on the relationship between commitment-based HR practices and human capital ROI, measured in the initial years of firms in different industries. We have tried to investigate to what extend both voluntary employee turnover and firm growth mediates this relationship.

We find for the main effect, the relationship between commitment-based HR practices and human capital ROI, a positive and significant effect. This means that when firms invest more in commitment-based HR practices, in this study the paid sick days, paid vacation, retirement plans and tuition reimbursement, the firm performance in terms of human capital ROI will increase. In other words, the firm will get something back for investing in their employees by creating more commitment through these commitment-based HR practices.

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firms. Reasons for that can be found in the social exchange model and the social environment within firms (Rousseau, 1995; Tsui et al., 1997). Because of these commitment-based HR practices, employees feels more recognized and are willing to act more in the interests of the firm (Rousseau, 1995). Moreover, the social exchange model plays a role here, since

employees will get some degree of employment security for flexible and expandable work roles (Tsui et al., 1997). This all will create higher commitment by employees in relation to the organization and when employees act more in the interest of the firm than for their own interest, higher organizational performance in terms of revenues is an investigated

consequence here.

We also have tried to analyse to what extend both commitment-based HR practices and human capital ROI are linked with voluntary employee turnover and firm growth. Our models give for all the individual relations non-significant results, meaning that we could not find any effect between the variables. Unfortunately, we could not add something here to the literature, besides the fact that we have investigated these links but did not find significant results. We came to the conclusion that there is no evidence for any significant effects between commitment-based HR practices and both voluntary employee turnover and firm growth, neither between voluntary employee turnover and firm growth with human capital ROI. We only have shown a negative and significant effect between voluntary employee turnover and firm growth, explained by the fact that when full-time employees voluntarily leave organizations, the number of full-time employees automatically decrease.

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turnover and firm growth did not mediate the positive relationship between commitment-based HR practices and human capital ROI.

Practical implications

Besides the theoretical implications, this study has also some practical implications. First of all, the relationship between commitment-based HR practices and human capital ROI was argued as a strong positive and significant relationship. Managers should be aware of the different practices that could create commitment by employees. It is evidenced based that more committed employees cause a rise in productivity and revenues (Cascio, 1991; Flamholtz, 1985; Becker & Huselid, 1998; Dyer & Reeves, 1995; Huselid, 1995; Katz,

Kochan & Keefe, 1987; Katz et al., 1983; Bartel 1994). Moreover, besides the fact that we did not find a significant effect between commitment-based HR practices and voluntary employee turnover, Allen et al. (2007) concluded that it is important to retain high performers.

Otherwise, you will disrupt and losses the knowledge, skills and abilities of employees in which you have invested. Hence, it is important for managers trying to retain the high performers for the firm, for example by having solid commitment-based HR practices.

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Limitations and future research

This study has several limitations, and since the fact that not all hypotheses were confirmed, it is important to elaborate them. In relation to the theoretical framework, we have used four different forms of commitment-based HR practices, based on work of Arthur (1994). Since there is not a fixed list with commitment-based HR practices, every study can choose different components. An idea for future research could be to switch the commitment-based HR practices used in this study into other commitment-commitment-based HR practices.

A type of methodological limitation in this study is the survival effect. In our final sample, we removed firms that did not survive, because of the fact that we were interested in firms who survived it over the first four years. It could result in a bias effect here. This study related commitment-based HR practices to both voluntary employee turnover and firm growth. Firms that do not grow and have high turnover rates, are more likely to fail.

Therefore, we would have reduced variance on voluntary employee turnover and firm growth that might reduce the amount of variance that is related to commitment-based HR practices. For that reason, we have to mention this as a limitation of our research.

Moreover, we have selected firms from different industries in our sample. On one hand, we can interpret this as a strength because of the fact that the results are derived from multiple industries and therefore are more generalizable, but on the other hand, industry effects might influence the results here, for instance standard industry wages and R&D intensity.

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firms after several years since the founding in relation to the implementation of the HR system.

CONCLUSION

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TABLE 1: CORRELATION MATRIX

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 1. NAICS 31 --- 2. NAICS 32 -.04 --- 3. NAICS 33 -.09 -.15* --- 4. NAICS 51 -.04 -.05 -.12* --- 5. NAICS 52 -.04 -.06 -.14* -.05 --- 6. NAICS 54 -.13* -.19* -.41* -.15* -.18* --- 7. NAICS 56 -.06 -.09 -.20* -.07 -.09 -.26* --- 8. NAICS 72 -.04 -.06 -.12* -.05 -.05 -.16* -.08 --- 9. NAICS 81 -.04 -.07 -.15* -.05 -.06 -.18* -.09 -.06 --- 10. Employees (T0) .00 -.02 .22* .01 .07 -.18* .00 -.05 -.06 --- 11. Mean employees (T1-T3) .01 -.01 .26* .01 .03 -.18* -.08 -.03 .01 .71* --- 12. Mean assets (T1-T3) -.05 .02 .21* .06 .07 -.13* -.18* .01 -.01 .27* .43* --- 13. Mean debts (T1-T3) .07 .08 .08 -.05 -.01 -.15* .07 .02 -.03 .07 .19* .24* --- 14. CHR (T0) -.07 -.06 .04 .05 .17* -.01 -.02 -.11 -.01 .30* .28* .27* -.05 --- 15. Mean CHR (T1-T3) -.12* .02 .02 .13* .13* .09 -.17* -.16* -.004 .15* .22* .35* -.02 .47* --- 16. Growth -.01 .01 .26* -.05 -.002 -.09 -.11 -.08 -.03 .43* .68* .30* .10 .19* .14* --- 17. Turnover -.01 -.02 .02 .01 -.01 -.10 .16* .02 -.02 .31* .04 .01 .02 .06 .02 -.17* --- 18. HC ROI (T0) .02 .02 -.08 .06 -.05 .12* -.11 -.03 .03 -.15* -.24* -.08 -.02 -.09 .01 -.16* -.04 --- 19. Mean HC ROI (T1-T3) .04 -.07 -.13* .004 -.07 .11 .03 -.06 .13* -.13* -.24* -.14* -.06 -.18* .07 -.11 -.02 .29* --- M .03 .06 .24 .04 .06 .34 .12 .05 .06 3.89 1.37 2.11 1.47 .36 1.02 3.72 .44 -.20 .33 SD .17 .24 .43 .20 .23 .47 .32 .21 .24 3.95 .91 .20 .73 .29 .37 7.07 1.40 1.01 .09

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TABLE 2: HIERARCHICAL REGRESSIONS

Model DV: HC ROI Model DV: Growth Model DV: Turnover Model DV: HC ROI Controls β β β β NAICS 31 .21 -.11 .01 .22 NAICS 32 -.42 .07 .01 -.42 NAICS 33 -.15 .15 .10 -.17 NAICS 51 -.17 -.28 .03 -.13 NAICS 52 -.22 -.10 -.11 -.21 NAICS 54 -- -- -- -- NAICS 56 .14 -.07 .40* .17 NAICS 72 -.20 -.26 .18 -.16 NAICS 81 .46* -.13 .06 .48* Employees (T0) .12 -.01 .54* .14 HC ROI (T0) .22* .01 -.03 .22* Mean Employees (T1-T3) -.20* .68* -.17 -.30* Mean Assets (T1-T3) -.07 .01 .02 -.07 Mean Debts (T1-T3) -.007 -.04 .03 -.001 Main Effects: CHR (T0) -.24* .02 -.02 -.24* Mean CHR (T1-T3) .25* -.02 .05 .25* Growth -- -- -.29* .12 Turnover -- -.19* -- -.02 R/R2 .21 .51 .23 .22 ΔR2 _.21 _.51 _.23 _.22

Notes: N = 309 firms. NAICS codes means the ‘North American Industry Codes’, where we have used dummy codes.

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TABLE 3: INDIRECT EFFECTS OF COMMITMENT-BASED HR PRACTICES ON HUMAN CAPITAL ROI

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APPENDIX A Measurements and scales

Commitment-based HR practices 1. Paid sick days.

‘’As of December 31, 2007, did [NAME BUSINESS] offer full-time employees or owners Paid sick days?’’

0: No 1: Yes

2. Paid vacation.

‘’As of December 31, 2007, did [NAME BUSINESS] offer full-time employees or owners Paid vacation?’’

0: No 1: Yes

3. Retirement plans.

‘’As of December 31, 2007, did [NAME BUSINESS] offer full-time employees or owners A retirement plan such as profit sharing, pension, including 401K, annuity, Keogh, etc.?’’ 0: No

1: Yes

4. Tuition reimbursement.

‘’As of December 31, 2007, did [NAME BUSINESS] offer full-time employees or owners Tuition reimbursement?’’

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Voluntary Employee Turnover Formula used in the study:

Num_FT_Employees year 3 – Num_FT_Employees year 1.

An decrease in the number of full-time employees is assumed as voluntary employee turnover.

Firm growth

Formula used in the study:

Num_FT_Employees year 3 – Num_FT_Employees year 1.

An increase in the number of full-time employees is assumed as firm growth.

Human capital ROI

Formula used in the study:

1. Variable_tot_revenue_r

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Measurement and scales of the variable total revenue and variable total wages 1. Variable total revenue

Responses:

Value Category Cases Weighted

0 1 $500 or less 2 $501 to $1,000 3 $1,001 to $3,000 4 $3,001 to $5,000 5 $5,001 to $10,000 6 $10,001 to $25,000 7 $25,001 to $100,000 8 $100,001 to $1,000,000 9 $1,000,001 or more Sysmiss

2. Variable total wages

Responses:

Value Category Cases Weighted