IMPACT OF EMPLOYEES’ SOCIAL CHARACTERISTICS ON COMPANIES’ PERFORMANCE: CASE OF CROATIA

Ivana Tadić, MSc, University of Split, Faculty of Economics, Split, CroatiaŽeljana Aljinović Barać, PhD, University of Split, Faculty of Economics, Split, Croatia

ABSTRACT

Different researches from the human resource management showed that human resource practices had strong and positive impact on financial and productivity performance of different companies. The aim of this paper is to provide empirical evidence concerning impacts of human resource investments, more precisely vocational education and career development on companies’ financial performances. Verification of empirical evidence will be provided through the sample of Croatian labour intensive companies. All variables that will be used in this research will be based on previous researches on the similar topic, but also chosen according to the specificity of Croatia, as well as to the possibility of their implementation. The results of research confirm positive correlation between employees’ social characteristics and companies’ performance in Croatia.

INTRODUCTION

Contemporary human resource management has been changed from its traditional perspectives till nowadays. In the past, companies have not been disposed to human resource management, but to personnel management, which just included administrative practices regarding their employees. On the other hand, companies’ exposure to constant changes compelled them to develop the scope of its departments in order to achieve greater organisational success, which resulted with human resource departments. Companies, today, are aware of the fact that among all sets of assets, the “soft” one, meaning human resources, represent the key factor for organisational success. Many authors (Becker, Huselid and Ulrich, 2001; Huselid, 1995; and Ichinowski, Shaw and Prennushi, 1997) showed that human resource practices have strong and positive impact on financial and productivity performance of different companies. In order to use all the benefits from different human resource practices, there is evident and required investment in human resources (individual growth and human resource development), which will finally end up with development and increasing organisational performance.

The aim of this paper is to provide empirical evidence of impacts of human resource investments, more precisely vocational education and career development on companies’ financial performances. The reminder of the paper is organized as follows. Firstly, theoretical aspects relating the importance of human resources as the key factor for organisational success, especially the importance of it development in creation of continuous improvement and organisational development will be provided. In the next section, research hypothesis will be developed. After that, variables used and sampling methodology will be described. Financial indicators that will be used in this empirical research will be based on previous researches on the similar topic, but also chosen according to the specificity of Croatia as one of transitional European country, as well as to the possibility of their implementation. Last section summarizes our main findings and offers some implications and suggestions for future research.

HUMAN RESOURCE AS THE KEY FACTOR FOR OGANISATIONAL SUCCESS

The only solutions for the changes that are happening today in business environment are human resources. Despite the fact that two companies have the same structure of human resources regarding the same educational level, age structure, gender structure or working experience, every company has its unique set of human resources. Those are valuable, exceptional and very difficult to imitate according to their specificities as knowledge, special experience, skills, abilities or emotional intelligence (Belak, Barać and Tadić, 2009.) Companies understand the importance of investing in human resources, although there are still those that put human resources aside, considering some other facts more important. Even if company is faced with problems, it should be aware that their most valuable resources are human resources, because in those are embodied knowledge and experience which are considered as important asset for improvement.

Knowledge needed for achieving business objectives and resulting with business success is not just articulable knowledge, but also tacit knowledge and external knowledge. Latter is defined as knowledge that can be codified and written and subsequently studied. The level of articulable knowledge possessed by an individual

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can be appraised in terms of academic qualifications which signify the level of success that has been attained via the academic study of discipline. Second one, tacit knowledge, captures learning by doing and learning by experience. It is of great importance when considering the influence of knowledge upon performance. Finally, external knowledge captures the learning that is accumulated by individuals as they observe their peers. It is particularly difficult to quantify it in practice and it can be captured within tacit knowledge (Brown, Adams and Amjad, 2007). From afore stated, it is evident that knowledge possessed by employees represents one of the main factors in achieving business objectives and creating success. Upgrading knowledge with employees’ skills and abilities creates companies’ human capital. Human capital includes employees with a set of individual and collective knowledge, skills, abilities, attitudes, possibilities, behaviour and emotions. Employees become human capital for their employers in the moment when they contribute with their own knowledge and abilities in creating material and non material value of the company (Belak, Barać and Tadić, 2009.).

Human resources can be considered as critical assets if companies do not invest in them. By investment in human resources, we consider possibilities for individual development and human resource development. It is clear that when employees enter into business for the first time they have only their vocational education corresponded with adequate academic qualification level needed for specified job. Their experience still does not exist, as much as majority of their professional skills. This will result with weaker effects than it would be after developing them. Having employees with the proper education, but also providing them with proper training and development is essential for the company in realizing business objectives, increasing company’s performance and creating sustainable competitive advantage.

On the other hand, new job and individual development are not the only reasons that require human resource development. There are many other factors, primary changes, such as: business and economic, technological, organisational or social change. In short, Stone (2005) describes business and economic changes through deregulation, international competition, tariff reduction, global outsourcing and restructuring. Technology is also faced with greater changes than it has ever been, because no employee or organisation can escape its whirlwind impact. Those require knowledge workers, especially information intensive sectors. Constant development is also required by organisational change, because organisations are becoming more flexible, participative, simultaneously tougher and more humane. They increasingly value both accountability and creativity and seek competitive advantage through people strategies. Finally, companies are exposed to changes in social attitudes, legal requirements or industrial relations. All above mentioned is reason for creating and enabling employees with proper training, individual and organisational development. In addition, it can be expected that the higher is a value of human capital, the more successful the company will be and the greater its competitive advantage over its rivals will be and vice versa.

HUMAN RESOURCE DEVELOPMENT

Role of human resources and its development has become crucial, especially for the success of the companies whose quality requirements are on a considerably higher level than quantity ones. Not so long ago, practice of human resource development (HRD), has been qualified just as traditional training for employees’ development, either internal or external training. Afterwards, HRD definition has expanded its focus. HRD by Stone’s (2005) definition includes training and development, career planning and performance appraisal. Its focus is on acquisition of the required attitudes, knowledge and skills to facilitate the achievement of employee career goals and organisational strategic objectives. Also it can be defined as a process for developing and unleashing human expertise (competence) through organisation development and personnel training and development for the purpose of improving performance (Clardy, 2007), or similarly as a process of fostering organisational learning with the objective of improving organisational performance and enhancing individual competence and career prospects (Cowell, 2007).

The aim of all companies is to create competitive advantage. Some of them create above average profits and have competitive advantage due to some strategically important factors, such as possessing a new technology or introducing a new product. Thus, some strategic advantages can be easily neutralized or even imitated (Clard, 2007). Oppositely, some companies understand the crucial element for creating competitive advantage that can not be easily imitated or neutralized, and that are human resources, as critical, unique and valuable resource of every company. Unfortunately, organisations spend little on HRD, especially when it comes to expenditures and usually cut back on human resources, especially on education. Many of them will invest in new machinery and equipment rather than in human resources. Oppositely, those companies have to rethink and to increase competitiveness by investing in human capital, providing organisational learning with the objective of improving organisational performance, as well as enhancing individual competence and career prospects. That is especially evident in global market place, faced with continuous environmental changes,

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where the most important asset is human capital and not the physical one. Those who undertake this kind of business strategy, create themselves possibility for prosperity, growth and improving its performance and providing human resources with possibilities of proper individual and career development. Similarly, leading companies recognise that HRD can be powerful tool for generating change and creating a competitive advantage, where is shown a strong correlation between profit growth and productivity improvements and increased expenditure on human resource development (Stone, 2005). On the other hand, each employee should be interested in career planning and development, which is closely related to each person’s self concept, growth, job satisfaction and finally organisation prosperity and performance growth.

Having adequate academic qualification degree, employee enters into the business world for the first time and starts his/her cycle of career development. In the first stage (Apprenticeship) employee is trying to adapt as being a worker, getting familiar with the co-workers, socializing and gaining some initial success. In the second stage (Advancement) employee is much more concerned in achievement, esteem and autonomy, showing own potential, self confidence and independence in work and the most important, employee is competent in solving business problems and dealing with important tasks without supervision. The most usual characteristics for the following stage (Maintenance) in career development process is confirmed position with required knowledge and abilities which sees the conversion from being the trainer to newcomers, and not being responsible just for his/her own work but the work of younger colleagues, as well as sequence of professional development. And finally, the last stage in this cycle (Strategic thinking) can be described as preparation for the retirement and the end of one’s professional career (Tadić, 2005.) Possession of academic qualification degree is not enough for individual career growth. Individuals, just like organisations are confronted with everyday business and economic changes, technical changes, new organisational requirements, new client/customer requirements and others. After company supports individual development and offers possibilities for continuous growth and advancement, by providing investments and organisationally supported development, employees have to be prepared to take the time and effort for their own prosperity. In this way job satisfaction will be higher, individual results will grow as well as organisational performances will be increased on mutual satisfaction.

DEFINITION OF HYPOTHESES AND DATA SELECTION

Research hypothesis of this paper is to test company’s performance association with different human resources characteristics. In order to test this, following statistical hypotheses were developed:

HYPOTHESIS 1:H0 ... Companies in labor intensive industry have no specific social characteristics regarding professional qualification, age and gender of its employees.H1 ... Companies in labor intensive industry have specific social characteristics regarding professional qualification, age and gender of its employees.

HYPOTHESIS 2:H0 ...There is no statistically significant difference in company's performance measurement regarding number of employees, their education, age, gender and amount of human resources expenditures.H1 ...There is statistically significant difference in company's performance measurement regarding number of employees, their education, age, gender and amount of human resources expenditures.

Two separate researches were conducted for this study. First, the sample for archival research was formed from Croatian Financial Services Supervisory Agency (HANFA) data base available at http://www.hanfa.hr. Annual financial reports of all joint stock companies for the year 2007 were reviewed. Companies were selected in the sample if their main activity is designated in divisions 01 of National Classification of Economic Activities (NCEA). In explanation, Act on the National Classification of Economic Activities (Official Gazette of the Republic of Croatia, No. 52/2003) sets up a list of economic activities and requires classification of all companies with regards to their main activity. Main activity of the company is defined in Article 7 as “an activity established according to the largest share in the total value added in the case of business entities which make profit through production, trade or offering of services on the market, or by the largest share in the number of employees according to the payroll and gross paid-off salaries in case of business entities which do not make profit through production, trade and offering of services on the market”. Division 01 refers to agriculture and food processing industry so companies that are designated in that division can be treated as labor intensive. Applying this criterion, relatively homogenous sample is provided. By extracting figures from annual financial statements, financial data necessary for company’s performance evaluation were collected.

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Second, a survey with human resources department personnel was conducted to obtain information about level of education, age and gender of companies’ employees. All Croatian joint stock companies from agriculture and food processing industry were contacted (37 companies). First contact to all companies was telephone conversation with human resource executives, asking them permission for sending them questionnaire they had to fulfil. All questionnaires were sent to human resource departments by electronic mail or fax machine. Those were continuing two tables that respondents had to fulfil; the first one included the data regarding age of employees divided into ranges by gender and the other one included the number of employees regarding academic qualification, also by gender. Questionnaire was followed by cover letter explaining the purpose and intention of the research, as well as guaranteeing the anonymity to the companies. Respondents sent questionnaires back, in the same way they had received them; by electronic mail or fax machine. The response rate was 37,83% (14 of 37 companies) and it can be considered to be statistically significant, forming a final sample.

To test a first hypothesis about organizational, human resources and financial specificities of companies in agriculture and food processing industry, in-depth structural analysis was done. The following characteristics of companies in the sample were analyzed:

Academic qualification of employees Age of employees Gender of employees

To test a second hypothesis about impact of employees’ social characteristics on financial performance,

regression model was used. Next step was selection and definition of dependent and independent variables. Business Excellence (BEX) index is defined as dependent variable, as the most appropriate measure of companies’ performance. Namely, BEX index is predictive statistical ratio model for determining a company's excellence. Belak and Aljinović Barać (2007) constructed this model based upon Altman's Z-score, taking into consideration characteristics of financial reporting in Croatia and specificities of Croatian capital market. BEX model combines four different financial ratios to determine the likelihood of excellence amongst companies. Generally speaking, the greater the index means the better the total excellence of the company. Detail description of BEX index is shown in the table below:

Table 1: Dependent variable descriptionSCORE COEF. DESCRIPTIONProfitability ratio 0,388 EBIT / total assets

calculated from income statement and balance sheet dataValue added ratio 0,579 Net profit / (subscribed capital * price of capital)

calculated from balance sheet and income statement Liquidity ratio 0,153 (current assets - current liabilities) / total assets

calculated from balance sheet dataFinancial strength ratio 0,316 5 x (profit + depreciation + amortization) / debt

calculated from balance sheet and income statement

Source: Belak, Aljinović Barać (2007)

For the purpose of the research, companies were divided in two groups:GROUP I - companies with BEX index value exceeding the average value of index for industry sector GROUP II - companies with BEX index value below the average value of index for industry sector

Taking into account limitations of the available data, different measures of human resources characteristics are selected as independent variables:

Academic qualification of employees Age of employees Gender of employees Annual salary per employee

Furthermore, size of the company measured by the number of employees and the ownership structure, as independent variables, were used. Detail description of independent variables is shown in the following table:

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Table 2: Independent variables descriptionVARIABLE SYMBol DESCRIPTIONProfessional qualification (number of employees)1

ESSS-2YSSCDUDPGS

Professional qualification according to vocational education transformed into relative frequenciesObtained from survey with human resource executives

Age (number of employees)2 APPRADVMAINTSTRTG

Age structure of employees transformed into relative frequenciesObtained from survey with human resource executives

Gender (number of employees) GEND 1 = MALE2 = FEMALEObtained from survey with head human resource executives

Annual salary per employee SLRY Salaries / Number of employeesextracted from profit and loss account and notes in the financial statements

Size of the company (measured by number of employees)

SIZE 1 = SMALL (50 to 250 employees)2 = MIDDLE (251 to 500 employees)3 = LARGE (more than 500 employees)Obtained from survey with head of human resources department

Ownership structure OWN 1 = state-owned2 = private-domestic owned3 = private – foreign ownedextracted from notes in the financial statements

Source: Authors’ elaboration

METHODOLOGY AND RESULTS

In order to test settled hypotheses, different statistical techniques have been used. Descriptive statistics calculations and graphs were used to find out human resources characteristics in agriculture and food processing industry.

Chart 1: Structure of employees regarding age and gender

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MALE FEMALE

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Source: Authors’ elaboration

From the Chart 1 it is evident that group of male respondents represents the higher number of employees which is not unusual in regards to labor intensive industry. Observing male employees, the greatest share of subjects belongs to those within Maintenance stage of career development cycle (age 46-55), followed

1 In compliance with Croatian educational system: ES = elementary school; SS – 2Y = 2 years of secondary school education; SS = 4 years of secondary school education; CD = Non-university college degree; UD = University degree; PGS = Post graduate studies, including Master's degree and Doctorate degree2 In compliance with human resources development phases: Stage I. - Apprenticeship (age 18 to 30); Stage II. - Advancement (age 31 to 45); Stage III. - Maintenance (age 46 to 55); Stage IV. - Strategic thinking (age 56 to 65) 

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by the employees within Advancement stage (age 31-45). Evident problem of this industry is that in a nearby future this structure of employees will transfer from the Maintenance stage into the stage of Strategic thinking (age 56-65) and will become “old industry”. In that case companies will have majority of employees with obsolete knowledge, skills and abilities and should invest in employees that would leave the company soon due to their retirement. Positive fact within male employees is that mentioned group of employees is followed by those within Advancement stage; and those are now independent and competent workers with skills, abilities and possibilities for showing their full potential in solving business problems. Next negative element is visible within greater number of preretirement group of employees (age 56-65) in relation to the young employees (age 18-30). On the other hand, positive elements can be noticed regarding female employees. Firstly, the greatest proportion of employees belongs to those within the Advancement stage. This share is not noticeably greater than the share within Maintenance stage, but the fact that provides more optimistic future is greater share of young employees in relation to the group of the oldest ones, which is not the case regarding to male. This provides the possibility that all investments that companies should undertake in the future through HRD are more likely to stay incorporated in the company within its human capital.

Chart 2: Structure of employees regarding academic qualification and gender

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Source: Authors’ elaboration

In chart 2 there can be noticed similar results comparing male and female employees. Results that are obtained among employees in regards to their academic qualification and gender are quite real considering Croatian labor intensive industry, which requires physical work more than mental work. The majority of employees represent those that finished full program of secondary school education, what can be considered as optional level of vocational education for the labor intensive industry. In the case of male and female employees, the next greatest proportion belongs to those who finished just elementary school, which can also be justified with the nature of work in agriculture and food processing industry. Observing female employees, there is greater difference in the share of employees with the university degree in relation to those with non-university college degree, than within male population, what can be explained with the fact that in Croatia share of citizens possessing university degree is greater in favor of female (Tadić, 2005). Share of employees that possess Master or Doctorial qualification is evident more within male population and is explained by the fact that those represent employees on managerial positions and in Croatia these positions are mostly male positions (Tadić, 2005).

Presented findings indicate that Croatian companies in labor intensive industry have specific social characteristics regarding professional qualification, age and gender of its employees. Thus, first stated hypothesis can be accepted.

Because of the limitation of available data, primarily sample size, independent samples t-test and bivariate correlations test were conducted to investigate relations between company's performance measurement and human resources characteristics. One-sample Kolmogorov-Smirnov test was used to test normality of data distribution as precondition for independent samples t-test.

As it can be seen from presented results in table 3, there is statistically significant difference in ownership and size between companies in group I (“good”) and group II (“bad”). The owners of “good” companies are usually foreign, while “bad” companies are private-domestic owned. This can be supported with the fact that Croatian companies still do not invest in HRD and business in general, as much as foreign companies do, firstly considering Western European companies in this case. Domestic companies, invest certain

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budget, but still not adequate. Croatia as one of transitional European countries still does not notice total need of HRD investments in fostering business objectives. Furthermore, “good” companies are large (measured by number of employees – have more than 500 employees) while “bad” companies are usually middle size, having between 250 and 500 employees. Age structure of employees also found statistically significant difference between companies in group I and group II. “Good” companies in average have great proportion (24%) of younger employees (age 18 to 30) and companies selected as “bad” have in average great proportion (42% and 14) of elder employees (age 45 to 55 and 55 to 65). Possible explanation is that young employees are those that possess skills, abilities and articulable knowledge in greater proportion than older one. What is more important is the fact that young employees are more willing and eager to learn, develop themselves and have more opportunities for career development. Companies are also more prone of investing in younger employees, providing them with possibilities for individual development in order to make them to stay within the company and keeping invested money within companies’ human capital. There were found no statistically significant differences in “good” and “bad” companies with regard to academic qualification. Exceptional, there is statistically significant difference in relative number of employees with post-graduate degree between companies in group I and group II. Moreover, a proportion of employees with master’s and doctorate degree is higher in “bad” companies (0,4%) than in “good” ones (0,01%). Explanation for this can be the fact that postgraduate studies are not so important in labor intensive industry than it would be in service industry, especially in information intensive sector.

Table 3: Independent variables descriptionVARIABLE Kolmogorov

-SmirnovAsymp. Sig. (2-tailed)

MEANS t-value Sig (2-tailed)

Group I Group II

OWN 1,121 0,162 3* 2* -2,184 0,050

SIZE 1,242 0,092 3* 2* 1,256 0,233

SLRY 0,939 0,341 108,8680 80,1041 -1,281 0,224

APPR 0,507 0,960 0,2397 0,0842 -4,753 0,000

ADV 0,676 0,751 0,4045 0,3553 -0,985 0,344

MAINT 0,470 0,980 0,2853 0,4226 2,660 0,021

STRTG 0,722 0,675 0,0705 0,1378 3,130 0,009

UD 0,821 0,510 0,1072 0,0843 -0,807 0,435

CD 0,523 0,947 0,0377 0,0490 1,434 0,177

SS 0,438 0,991 0,4421 0,4241 -0,274 0,789

ES 0,482 0,974 0,2075 0,2598 1,205 0,251

SS_2Y 0,495 0,967 0,2053 0,1785 -0,435 0,671

PGD 0,783 0,572 0,0001 0,0044 3,628 0,003

Note: mode instead mean because of nominal variablesSource: Authors’ elaboration

Finally, bivariate correlations between variables are tested and results are presented in the table 4:Table 4: Bivariate correlation coefficients

SLRY APPR ADV MAINT STRTG UD CD SS ES SS_2Y PGD BEXSLRY 1                      

APPR 0,119 1                    

ADV 0,273 0,109 1                  

MAINT -0,162 -0,694* -0,708* 1                

STRTG -0,352 -0,553 -0,407 0,351 1              

UD 0,785* 0,122 0,170 -0,158 -0,183 1            

CD 0,260 -0,327 -0,255 0,420 0,141 0,374 1          

SS 0,236 0,174 0,384 -0,441 -0,029 0,147 0,138 1        

ES -0,561 -0,029 -0,549* 0,255 0,466 -0,500 -0,123 -0,495 1      

SS_2Y -0,236 -0,161 -0,040 0,281 -0,250 -0,304 -0,384 -0,783* 0,037 1    

PGD -0,130 -0,546 -0,270 0,648 0,073 -0,109 0,567 -0,148 0,094 0,034 1  

BEX 0,533 0,582 0,488 -0,679* -0,463 0,562 -0,362 0,056 -0,278 -0,051 -0,619 1

*Statistically significant at the 0.01 level (2-tailed).Source: Authors’ elaboration

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In explanation, bivariate correlation coefficients indicate that there is a positive and high correlation (coefficient 0,785) between amount of salary and relative number of employees with university degree, ceteris paribus. Employees with higher academic level require higher salary. Proportion of younger employees (age 18 to 30) was found statistically significant and strong negative correlated (coefficient -0,694) with proportion of older employees. Relative frequency of employees in age from 31 to 45 is negative and relatively high statistically significant correlated with academic qualification variable elementary school (coefficient -0,549). Age variable apprenticeship (age 18 to 30) and academic variable elementary school are negatively correlated with almost all other variables, ceteris paribus, although these correlations were not found statistically significant. These findings are in compliance with results of independent sample t-test. One of the reasons can be that companies reduce number of employees with low education in exchange for employees with higher education. Additional explanation can be found in the fact that employees continue with lifelong education and are part of HRD during their career development within a company. Academic variables 2 years of secondary school education and 4 years of secondary school education were found statistically significant and strong negative correlated (coefficient -0,784), implying that companies are motivating employees to upgrade their education level, ceteris paribus. Finally, age variable maintenance (age 46 to 55) was only one found statistically significant correlated (coefficient -0,679) with value of BEX index as company’s performance measure, ceteris paribus, confirming the results of statistically significant difference in age structure between good and bad companies. The reason for this can be explained in the fact that older employees have inferior results than younger one, due to the fact that their knowledge as well as skills and abilities are obsolete and require personal development and further investments in order to improve them and increase business results. Companies should decide whether to invest in older employees or not, is that proper business decision or not.

However, all presented findings confirm statistically significant difference in company's performance measurement regarding number of employees, their education, age, gender and amount of human resources expenditures. This indicates that second stated hypothesis can be accepted.

CONCLUSION

Conducted research and obtained results stress importance of investments in human resource development on company’s performance achievement. Our findings are based on a sample of large Croatian labor intensive companies, and they suggest that financial performance of the company depends on human resources investments. This means that companies with greater proportion of younger employees, with higher level of employees’ academic qualification and with possibilities of HRD accomplishment as well as individual development, will have better financial performance, and vice versa. Summarizing the findings of this paper it is evident that companies should pay reasonable attention in managing human resources and realizing their importance and impact on company’s financial result as well as their competitive advantage.

Future research should aim to explore in more details different human capital categories and their impact on companies’ financial performances in order to get precise directives for investments in human resource development.

REFERENCES

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