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Human Resources in Small Business

The focus of this topic will be the training of employees and the appropriate compensation system for the human resource which are playing an important role in well-managed staff. The literature review has gathered different ideas from a variety of sources and authors on the topic and has revealed that the small business is less likely to effectively manage the human resource because of insufficient funds. Therefore, they could not have a proper training method and comprehensive compensation system even though a large number of business owners do realize their importance and benefits of applying two of the above mentioned methods.

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With a view to determine whether the small business can effectively manage its human resource, a couple of interviews are conducted. Two small business owners who are from Quoc Bao restaurant and Tan Thanh plastic company are asked to share some interesting experiences as well as troubles they may meet in the way of managing their employees. Through the interview process, some differences are emerging which are the willingness of small business to pay the salary or other forms such as commission or bonus as high as possible to retent the employees and encourage them to work hard.

Next, the report will compare both of the interviewed small business owners’ methods of managing human resource which are from manufacturing and service perspectives. The report also shows the identification of some of the similarities and differences between the literature review and the interview. Further explanation and possibilities are also included at the end of the report. II. INTRODUCTION: Small business is becoming an optimal choice for those who want to have their own business and challenge themselves in the economic competitive environments.

Because of that, the small business has to have a well-managed human resource which could contributes to avoiding the high failure rate as shown in various researches. The report will aim to discuss the ability to manage human resources effectively in relation to training and compensation. There are three primary parts which are the literature review, the findings in Vietnamese small business as well as the comparison with the relevant theoretical concepts. III. LITERATURE REVIEW:

Introduction Currently, small business is expanding dramatically in many developing countries. To sustain in such competitive environment, small businesses have to manage a variety of different areas including finance, marketing, production, personal and personnel. Although there is a small number of employees in small firms but managing its human resources effectively, an area of personnel, has played a critical role in the survival and development of the firm .

This review will mainly discuss whether the small business can manage its human resource effectively and further, emphasise two of the approach to assist the staff’s management which are training and developing associated with compensation and incentives system. Training and development Training and developing employee is a crucial feature of human resource management. According to Ferguson & Reio Jr (2009), it might have a positive impact on the firm outcomes.

Moore, Petty, Palich & Longenecker (2010) all states that employee training and development are the two basic important components of a firm’s training and developing program. Employee training is mentioned as the process of instructing the new employees to meet the obligations of the firm’s knowledge, behaviours and skills that are required to perform in the positions in which they get hired. On the other hand, development is about the “continuous training and learning” that allows employees to strengthen their skills and knowledge (Hernandez & Franklin, 2004).

The training element is the central and essential part of employee training and developing system. Training is a fundamental factor in leading the success of the small business because it provides favoured conditions for not only employees but also the firm to achieve goals (Hernandez & Franklin 2004). Moreover, small business owners do not have large budget for recruitment proficient staffs, thus, training is an extremely important need (Hernandez & Franklin 2004).

After the process of recruitment, the training stage for the new employees must begin. Cosh (1998) and Huang (2001) maintain that in order to gain “some competitive advantages’’ in the world wide economy, it is vital for the expansion and success of a small business to have an educated and skill labour force. It has been found that most small business owner managers do realise the importance of training to their business but it is still very reluctant for them to participate in this kind of activity (Webster, 2005).

While large firms may have a specialized employee training and developing system with different methods (Hernandez & Franklin, 2004), small firms usually uses other inexpensive sources like college seminars and in-house training to develop employees’ skills (Cardon & Stevens, 2004). Cohen (1998, cited in Hernandez & Franklin, 2004) expressed that ‘restrictions on time, money, space and staff’ set a challenging obstacles for small business owner to overcome. There are two explanations provided for the “training ignorance” according to Storey and Westhead (1997).

First, managers of the small business have underestimated the benefit of training. Barney (1991, cited in Barrett & Mayson, 2007) suggested that human resource can create competitive advantages. An argument made by Scase (1995, cited in Barrett & Mayson, 2007) mentioned that if owner-managers cannot align their lifestyle with management, it may halt the firm from growing. The owner-managers recognise the significance of training to the firm performance has a strong impact on the ‘ability to overcome managerial capacity problem’ (Barringer, 1998 cited in Barrett & Mayson, 2007).

The probability of the firm success may be more likely to be higher if the owner can estimate the advantages of training effectively. The second reason is the training cost. Storey (2004) and Storey and Westhead (1997), cited in Barrett and Mayson (2007) observed that the training cost is too high for some of the small firms to afford. And the challenges that small firms embraces are cost (Arthur, 1995), time and resources (Klass, 2000) and the size of the firm (Heneman, 2000).

Additionally, Arthur (1995) affirms that cost is the most difficult challenge that small business has to face when training their employees. They usually have to weight up the benefits and cost of a training program before carrying on with it. Training can be quite sophisticated and resource demanded for small ventures (Billett, 2001; Westhead and Storey, 1996 cited in Redmond, Webster & Clus 2007). Likewise, Billet (2001) has stated in his research that small business use higher training price compared to larger ones.

Consequently, this is a contributing factor to the fact that informal training is more preferred by small business rather than large ones. Therefore, as reported by Cardon & Stevens (2004), sources of formal training for small business are limited. However, small business still can get the best out of each and every dollar invested in training in spite of their low budget (Hernandez & Franklin, 2004). Storey (2004) also stated that despite the acknowledgement of the importance of employee training, it is showed by researches that formal training is not commonly applied in these firms.

Lacking of time causes a common misunderstanding that small business is ‘too busy to train’ (Beresford and Saunders, 2005; Billet 2001; Gibbs 1997; Webster 2005 cited in Redmond, Webster & Clus 2007). Similarly, another studies from Kotey and Sheridan (2001) and Gilbert and John (2000) stated that it is an informal basis for the implementation of training induction to be started with. Furthermore, they suggested that the performance of the employee does not link with the internal and external training.

Due to the low investment in training, employee’s skills and knowledge might not be applied in the actual performance. Small business owners have to deal with several problems when carrying on training and development but according to Redmond, Webster and Clus (2007), there are two factors which can affect their mindset towards training and development. They stated that the owners will be more likely to involve in training activities if the system is applicable to the firm conditions and it is well organised in terms of time, location and content.

An appropriate training may contribute certainly to the firm outcomes (Redmond, Webster and Clus 2007). Compensation and incentive system Besides training and development system, compensation and incentives system are also another important aspect contributing to affect human resource management and staff retention. The first issue to deal with is the compensation which is the form of payment provided to employees usually based on wages, salaries and bonus (Hernandez & Franklin 2004).

In fact, Barrett & Mayson (2007) have stated that the performance and growth of small enterprises is directly linked to their ability to attract, motivate and make the employee works more productively by providing competitive salaries and suitable rewards. Similarly, according to Kovach (1987), paying the employees with a good salary to retent them is even easier and more efficient than making their work interesting. Further idea in favour of the compensation system comes from Hernandez & Franklin (2004) who stated that all firms regardless of its size and nature have to construct wage and salary and performance appraisal system.

Likewise, Balkin & Gomez-Mejia (1987) have thought that compensation or reward system may provide a competitive advantage to one small business to defeat over its rivals. Small firms have to strongly compete in wage and salary to attract qualified personnel and especially, keeping the staff with the business (Moore, Petty, Palich, & Longenecker, 2010). However, Moore, Petty, Palich, & Longenecker 2010 believed that small firms tend to underestimate the role of compensation and pay their staff with the lowest level of salary, even the minimum wage required by law.

This is not only because of the minor resources of small entrepreneurs but also the uncertainty about the ability of firm in the future to earn profit since new entrepreneurs have ‘high failure rates and shorter life cycles’ (Katz et al cited in Cardon & Stevens 2004). In a comparison between small firms and large firms, Hernandez and Franklin (2004) stated that large firms are willing to offer high salary and other benefits because of its harsh environment.

Employees in those firms usually have to work in a formal atmosphere with greater responsibilities and less involved in decision making process. Nevertheless, small business cannot afford such a high level of salary or other financial incentives but it allows a closer relationship between manager and employees in an informal environment and employees can engage in making decision (Dundon, Grugulis & Wilkinson, 1999 cited in Hernandez & Franklin 2004. . Although HRM practice in small business is carried out differently from large firms, its vital impact on both firms is the same. However, a survey about reward system discloses that the managers feel that cash can be used to motivate the performance of human resource but the majority of employees do not perceive it as their first rank, so the issue addressed is to tailor the reward system to the employee’s interests (Kovach 1987).

Therefore, besides compensation, incentive system or employee benefits consisting of health care and life insurance, retirement compensation, social security and others contributes to provide benefits to employees in purpose of maintain their commitment and devotion to the small firms but it would be harder for small firms to afford these kinds of expensive employee benefits compared to larger corporation (Moore, Petty, Palich & Longenecker 2010).

Moreover, Cardon & Stevens (2004) have observed that employee benefits in small business also differ from those in large corporations; especially long-term benefits such as life insurance may not be offered because small ventures have a high rate of failure. These most expensive benefits such as retirement compensation, is often raised funds by a large fast-growth organizations, where the funds are consistent with organizational success and profit (Balkin & Gomez-Mejia 1987).

According to Balkin & Gomez- Mejia (1987), an comprehensive study recommended that not only financial payments but also recognition, comfortable working environment are also taken into consideration to create mixed effectiveness in human resource management. In contrast to the above-mentioned research, Hornsby and Kuratko, cited in Barrett & Mayson 2007, argue that taffing and reward system plays an important role in human resource management but more research is needed to apply in a smaller firm to provide comprehensive staff effectiveness. The final component of compensation and incentive system is stock incentive which is a key approach to hold important personnel (Moore, Petty, Palich & Longenecker 2010).

According to Cardon & Stevens (2004), short term pay incentive based on profit and stock sharing might inspire and motivate small business’s staff more than large organisation since small venture employees have a larger level of capability to directly manage the outcomes of corporations and advocate collectivism as this becomes a stimulus for employees in the whole small firms to cooperate to achieve common goals (Heneman & Tansky 2002, cited in Cardon & Stevens 2004).

Long term pay incentives may corporate stock options which create a right of ownership for key staff in the business (Moore, Petty, Palich & Longenecker 2010) and encourage them to think and act for the interests of the ventures ( Cardon & Stevens 2004). Conclusion In conclusion, human resource management practices in small ventures and large organisation play the same role in the business development but the approach of the implementation differs from one another based on their size and nature.

Small firms have to deal with more challenges as a result of limited resources and funds as well as thorough competitive environment especially in the field of training and development along with compensation and incentive system. Training in small ventures has an informal basis to initiate and the expenditure of training is also an unresolved issue to the owners. Besides training staff, the compensation and incentive practices are also needed to be attentive since they are directly linked to the staff’s performance and retention.

To respond with the question raised in the beginning of this paper, the above-mentioned research discloses that the small venture may have the ability to manage its employees effectively if the business realises the importance of personnel management and invest their resources and funds in this area. With restrained resource, it could be tough for small firms but it could provide competitive advantages to survive in the growing number of small enterprises in current society because of the key position of personnel in the business.

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