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A STUDY ON THE RELATIONSHIP BETWEEN HUMAN RESOURCE MANAGEMENT PRACTICES AND
EMPLOYEE RETENTION
SANTHANA SINNAPPAN
MASTER OF HUMAN RESOURCE MANAGEMENT UNIVERSITI UTARA MALAYSIA
APRIL 2019
A STUDY ON THE RELATIONSHIP BETWEEN HUMAN RESOURCE MANAGEMENT PRACTICES AND
EMPLOYEE RETENTION
By
SANTHANA SINNAPPAN
Thesis Submitted to
School of Business Management, Universiti Utara Malaysia,
in Partial Fulfillment of the Requirement for the Master of
Human Resource Management (MHRM)
PERMISSION TO USE
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ABSTRACT
In this study, the objective was to determine the influence of HRM practices and work environment towards employee retention in selected SME companies. The research design used in this study is correlation study. The independent variables were HRM practices such as compensation, benefits and rewards, performance appraisal, training and career development. Working environment was also included as part of the independent variable. The dependent variable is employee retention. Survey method was used to collect data from 100 respondents in various SME companies, and the simple random sampling was applied. Finally, the finding shows all the HRM practices (compensation, benefits and rewards, performance appraisal, training and career development) and working environment were significantly correlated with the dependent variable (employee retention). Regression analysis identified that training and development contributes the most towards retaining the SME employees, followed by working environment practices. The result of this study had provided some beneficial information regarding: how SME can retain their employees particularly, on HRM practices such as training and development. The findings also can be used as a guideline for HRM practitioners in SME encouraging employees to attend training and to provide more career opportunities.
Keywords: HRM practices, Compensation, Benefits and Rewards, Performance Appraisal, Training and Development, Working Environment, Employee Retention and Small Medium Enterprises.
ABSTRAK
Kajian ini dijalankan untuk menilai pengaruh amalan sumber manusia dan persekitaran kerja terhadap pengekalan pekerja di syarikat-syarikat perusahan kecil dan sederhana (PKS) yang terpilih. Reka bentuk penyelidikan yang digunakan dalam kajian ini adalah kajian korelasi. Pemboleh ubah bebas terdiri daripada amalan sumber manusia seperti pampasan, manfaat dan ganjaran, penilaian prestasi, latihan dan pembangunan kerjaya.
Persekitaran kerja juga merupakan salah satu pemboleh ubah bebas manakala pemboleh ubah pengekalan pekerja merupakan pemboleh ubah bersandar. Responden kajian ini dipilih menggunakan pensampelan rawak mudah. Jumlah responden seramai 100 orang merupakan saiz sampel kajian ini yang terdiri daripada pekerja dari pelbagai firma PKS.
Keputusan kajian menunjukkan semua fungsi Sumber Manusia (pampasan, faedah dan ganjaran, penilaian prestasi, latihan dan pembangunan kerjaya) dan persekitaran kerja didapati berkait rapat dengan pemboleh ubah bersandar (pengekalan pekerja). Analisis regresi menunjukkan bahawa pemboleh ubah latihan dan pembangunan menjadi faktor menyumbang paling utama pengekalan pekerja PKS dan diikuti oleh persekitaran kerja.
Hasil kajian ini telah memberikan beberapa maklumat yang bermanfaat mengenai bagaimana PKS dapat mengekalkan pekerja mereka melalui amalan HRM khususnya latihan dan pembangunan. Penemuan ini juga menjadi panduan kepada pengurusan sumber manusia di PKS untuk menggalakkan lebih ramai pekerja menghadiri pelbagai latihan dan kursus dengan menyediakan lebih banyak peluang pekerjaan.
Kata kunci: Amalan-amalan Sumber Manusia, Pampasan, Faedah dan Ganjaran, Penilaian Prestasi, Latihan dan Pembangunan Kerjaya, Pengekalan Pekerja dan Perusahan Kecil dan Sederhana.
ACKNOWLEDGEMENT
All the praises and thanks to God who give me the strength to complete my research paper as to be fulfill for my master program. This praises belonging to him without any doubt as for Him who all the goodness belong.
Secondly, I would like to thank my entire family for their full support and understanding during the time taken doing the research. Especially both my parents (Mr. Sinnappan &
Mrs. Saurimah) who support me no matter how hard the situation that I was face in the time to complete my journey for the research to be fulfilled. Also not forget to my brother (Mr. Sahayaa Thevar) who always supported me from behind to complete my master program smoothly and lastly become reality.
A big appreciation to my Supervisor, Dr. Nor Azimah as her guidance is driven forces that make this research running at its right tract and direction. Her guidance and motivation makes the best of me to complete my research.
Finally, I thank to all my relatives, course mates, friends and colleagues for their help and support that’s make this journey smooth and reach the end with successfully. Thank you and May God bless them all.
i Table of Content
CHAPTER 1: INTRODUCTION
1.1 Background of the Study 1
1.2 Problem statement 2
1.3 Research Questions 5
1.4 Research Objectives 5
1.4.1 Specific Objectives 5
1.5 Significance of the Study 6
1.6 Scope and Limitations of the Study 7
1.7 Definition of the Key Terms 7
1.8 Organization of the Thesis 8
CHAPTER 2: LITERATURE REVIEW
2.1 Introduction 10
2.2 Employee Retention 10
2.3 Selected Human Resource Management Practices 12 2.3.1 Remuneration, compensations and rewards 12
2.3.2 Working Environment 14
2.3.3 Performance Appraisal 15
2.3.4 Training and Development 16
2.4 The Herzberg’s Two-Factor Theory 17
2.5 Conceptual Framework 18
2.6 Independent Variables Concept 20
2.6.1 Compensation, Benefits and Rewards and
Employee Retention 20
2.6.2 Performance Appraisal and Employee Retention 23 2.6.3 Training and Career Development and Employee Retention 24 2.6.4 Working Environment and Employee Retention 27
2.7 Summary 30
CHAPTER 3: METHODOLOGY
3.1 Introduction 31
3.2 Research Framework 31
3.3 Unit of Analysis 32
3.4 Population and Sampling Technique 32
3.5 Research Instrument 33
3.6 Measurement of Variable 34
3.7 Pre-testing of Research Instrument 35
3.7.1 Reliability 36
3.7.2 Validity 38
3.8 Data Collection 39
3.9 Data Analysis Techniques 40
3.9.1 Exploratory Data Analysis 40
3.9.2 Descriptive Statistics 42
ii
3.9.3 Inferential Analysis 43
3.10 Summary of Chapter 44
CHAPTER 4: FINDINGS
4.1 Introduction 45
4.2 Personal and Professional Profiles of the Respondents 46
4.3 Level of Employee Retention 48
4.4 Level of the Independent Variables 49
4.5 The Human Resource Management Practices Variables 50
4.6 Factors Explaining Employee Retention 52
4.7 Summary of Regression 55
4.8 Summary of the Findings 56
CHAPTER 5: CONCLUSIONS, DISCUSSION AND RECOMMENDATIONS
5.1 Introduction 57
5.2 Recapitulation of the Study 57
5.3 Discussion on Correlation Analysis 60
5.3.1Relationship between Compensation, Benefits and Rewards
and Employee Retention 60
5.3.2 Relationship between Training and Development and
Employee Retention 61
5.3.3 Relationship between Working Environment and
Employee Retention 62
5.3.4 Relationship between Performance Appraisal and
Employee Retention 62
5.4 Discussion for Regression Analysis 63
5.5 Implication 64
5.5.1 Implication for Theory 64
5.5.2 Implication of practices 64
5.6 Recommendation 65
5.6.1 Recommendation for practice 65
5.6.2 Recommendation for future research 66
5.7 Conclusion 66
6. References 67
7. Appendices 75
iii List of Tables
Table 3.6: Instruments 35
Table 3.7.1: Reliability Estimates for the Instruments in the Pilot-test (n=15) 38
Table 3.9.2: Mean Score 43
Table 4.2: Demography Profile 47
Table 4.3: Level of Employee Retention (n=100) 48
Table 4.4: Mean Score for the Independent Variables (n=100) 50 Table 4.5: Pearson Correlation Coefficients of Relationships between the Human Resource Management Practices with Employee Retention (n=100) 51 Table 4.6: Estimates of Coefficients for Employee Retention 53
Table 4.8: Summary of the Hypotheses Findings 56
iv List of Figures
Figures 2.5: Basic Structural Model for Retention of Employees
(Modified Version of Herzberg’s Two-Factor Theory). 19
Figures 3.2 Research Framework 32
v List of Abbreviation/ Notations/ Glossary of Terms
1. EDA – Exploratory Data Analysis 2. GLC – Government Link Company 3. HRM – Human Resource Management 4. HR – Human Resource
5. MNC – Multinational Company 6. MRL – Multiple Linear Regression 7. MRS – Manufacturing Related Service 8. SME – Small Medium Enterprise
9. SPSS – Statistical Package for the Social Sciences
1 CHAPTER 1: INTRODUCTION
1.1 Background of the Study
Resource based views have highlighted that employees are the most important assets for the organization to compete with rivals. Talented employees not only improve the productivity but also cultivate a healthy and highly competitive working environment (Peteraf & Barney, 2003). According to Adam Equity theory (1960), if there is an imbalance between the expectations of employees and employers, a gap exists definitely.
If the gap gets bigger and larger, and at same time the fringe opportunities arise from rivals and this phenomena leads to a massive employee turnover. Based on Chaminade (2007), many organizations face the obstacles to retain the employees, and even more challenging, to encourage talented employees to stay longer. Kehr (2004), claims that the retention strategy is more essential than hiring new employees. He added that failure to retain employees does not add to the cost only, but loss of talented workers also leads to loss of loyal customers, clients and a healthy working environment.
According to Walker (2001), retention of talented workers is essential in achieving competitive advantages. He also added, employees who received full control, established good relationship and excelled in their performance were likely to stay in their organization. Understanding the importance of retention of loyal workers has led
2 employers to deploy various strategies such as various training skills to encourage workers to remain longer in the organization. When any organization failed to comply with the needs of the employees, namely, compensation benefits and rewards, ongoing training and professional development in the organization, working environment, leadership and other factors, all these led to a high turnover among the current employees. This new era of high turnover called job hopping brings a high impact to the current situation among the working people.
1.2 Problem Statement
Job hopping becomes a trend with Generation Y who is mobile and capable of seeking better positions and benefits. Because of this, there is a shortage of quality and qualified talents to fill the vacancies. High turnover is not healthy because it leads to the organization losing skilled and capable workers. Furthermore, the organization needs to spend more money on the recruiting, training, compensation package and other benefits to the new employees. This does not promise that the new employee will be retained for a longer period (Grubb, 2006).
However, the organization needs to recruit new employees and bring in new technology with other advanced skills to offset any competition from other businesses. Furthermore, if an organization wants to keep the employees satisfied, employer needs to provide a comprehensive plan for career growth with the organization. For example, employers
3 need to provide essential resources such as training, modern technology and industry updates (Tate, 2007). Besides that, organization can establish a framework to retain employees for a longer period by plumbing in place effective methods, practices and policies to retain the best employees or talents (Chaminade, 2007). Newer the less, the primary aim to retain talent in the work place is mainly to prevent the loss of capable and skilled employees.
Several HR factors in an organization scheme attract, retain and engage their employees.
Employers place certain benefits to attract and retain talented staff (Koo & Chow, 2008).
Leopold (2010), proposed that as the workplace advances, the HRM policies and practices should evolve in parallel as well. Changes in HRM practices are necessary as the characteristics of employees change as well. In order to ensure that the new generation remains loyal with the organization, SME Companies in Klang Valley area must revisit and revise their HRM packages among others.
In this study, the researcher focused on Small Medium Enterprises in Malaysia (SME).
SME is based primarily on two key points, e.g the total workforce and annual profits.
There are four sectors included in the SMEs are primary agriculture, manufacturing (including agro-based), manufacturing related services (MRS) and services (including information and communications technology).
4 SME companies are mostly involved in the service industry. These companies compete with the GLC Companies in the Klang Valley. The HRM practices given by the GLC companies are a high challenge for the SME Companies. If they would like to remain, competitive, their staff and their company, HRM practices should be equal or similar with the GLC companies in Klang Valley. This is because the employees look for better HR practices, especially, progress and improvement in their specific jobs, compensation benefits, rewards, good and safe working environment etc. Some of the SME companies failed to provide such benefits to their employees.
This research study attempted to identify the effects on especially chosen HRM practices in companies on employee retention. There is a relationship between HRM practices which lean towards high turnover among the employees. When an employee was unsatisfied or found company compensation benefits and rewards, training and career development, performance appraisal, working environment unattractive and not provided by their organization, all these factors can fail to retain the employee in that organization.
As such, this study was conducted to determine whether compensation and benefits, performance appraisal, training and development and working environment influenced employee retention in SME companies in Klang Valley. For this the researcher asked with four main research questions.
5 1.3 Research Questions
The study intends to provide answer to the following questions:
i. What is the level of employee retention among workers in selected SME companies in Klang Valley?
ii. What is the level of human resource management practices (Compensation, Benefits and rewards, Performance Appraisal, Training and Career Development, Working Environment) in selected SME companies in Klang Valley?
iii. Is there any relationship between human resource management practices (Compensation, Benefits and rewards, Performance Appraisal, Training and Career Development, Working Environment) and employee retention among workers in selected SME companies in Klang Valley?
iv. What could be the most dominant factor which determines the employee retention among workers in selected SME companies in the Klang Valley?
1.4 Research Objectives
The general objective of this research is to determine the influence of Human Resource Management (HRM) practices towards employee retention among selected SME companies in Klang Valley.
6 1.4.1 Specific Objectives
Following are the specific objectives:-
i. To describe the level of employee retention among workers in selected SME companies in Klang Valley
ii. To describe the level of human resource management practices (Compensation, Benefits and rewards, Performance Appraisal, Training and Career Development, Working Environment).
iii. To examine the relationship between human resource management practices (Compensation, Benefits and rewards, Performance Appraisal, Training and Career Development, Working Environment) and employee retention among workers in selected SME companies in Klang Valley.
iv. To determine the most dominant factor which influences the employee retention among workers in selected SME companies in Klang Valley.
1.5 Significance of the Study
The result highlighted some beneficial information regarding how SME can retain their employee’s particularity on HRM practices. The findings also were guidelines for HRM practitioners to design a new policy which would encourage more employees to remain longer. This research results provide basic ideas or knowledge for future researchers on what are the HRM practices which foster the employee retain in an organisation in SME companies in Klang Valley. These results also were beneficial for employees to recognise
7 for their future the most accepted HRM practices in their organisation. The results of this study also support the research theory which explains the correlational of HRM functions with employee retention.
1.6 Scope and Limitations of the Study
The researcher included only 20 small and medium business service sectors in Kuala Lumpur, Malaysia. SME Companies (SME) in Malaysia maintained a databank of small and medium size companies which is regularly updated. The focus group included all profit oriented businesses, comprising fifty or fewer employees. They consisted of: Event Management Company, apparel shop, computer shop, book store, clinic, pharmacy, accessories shop, café, jewelers, kindergarten, advertisement and printing, tuition centre and many more. The focus on only 20 types of SME is due to few factors such as ready acceptability and co-operation from the SME owners, convenient and easy accessibility of the contacts, and a shorter timeline to complete the data gathering. In comparison, in multinational companies (MNC) and government link companies (GLC) a considerable amount of red tape, vetting or scrutiny confront the researcher. Reluctance to expose the limitations and weaknesses inherent in their companies was another factor which contributed to their lack of interest and co-operation.
8 1.7 Definition of the Key Terms
This section elaborates on a few key terms which were used in this study with an explanation of the meaning for each term.
i. Employee Retention – termed as the organization’s ability to continue to have/retain its employees (Chaminade, 2007).
ii. Compensation – defined as a return received from employer in the form of wages, and other allowances (Penn Human Resource, 2007).
iii. Benefits - Can be defined as statutory benefits and non- statutory benefits (Penn Human Resource, 2007).
iv. Performance Appraisal – defined as structured system to determine the performance of employees and their contribution to an organization (Andrew, 2009).
v. Training and Career Development- program which design to improve knowledge, skill and abilities (Mondy et al., 2005).
vi. Working Environment- defined as work setting which has been basic required to perform a job (Zeytinoglu & Denton, 2005).
1.8 Organization of the Thesis
Five chapters are included in this research. The background of the study, the problem statement, research objectives, significance of the study and limitation are outlined in Chapter One. Relevant literatures on human resource practices (HRM) and employee retention are reviewed in Chapter Two. Chapter Three presented the methodology used
9 for the main research. Topics covered were research frame work, research design, sampling and the respondents. Instrument of the study was described in detail. This chapter also covered data analysis techniques and data collection. Chapter four reported the findings. Background profile pertaining to the respondents was presented in relevant tables. Research objectives were accordingly explained in this research. Discussion on the findings was also included in this chapter. The Theoretical framework for the study was also specified. The relationship between independent variables and dependent variables was also studied in this chapter. Chapter Five includes the conclusions, discussion and recommendations. This chapter also covered the implication of theory and practice. Recommendation for practice and future study was also stated in this chapter.
10 CHAPTER 2: LITERATURE REVIEW
2.1 Introduction
The concepts of employee retention and selected human resource management practices were discussed in detail in this study. The underpinning theory and research hypothesis were formulated in this chapter.
2.2 Employee Retention
Employee retention is a desire of the employee to stay in an organization (Cho et al., 2009; Coombs, 2009; D'Amato & Herzfeldt, 2008; Ellenbecker, 2004; McCarthy &
Tyrrell, Lehane, 2007). Generally, the concept of desire to remain discussed from two aspects, namely the desire to remain with current employment and the desire to stay in the organization (Deckop, Konrad, Perlmutter, & Freely, 2006; Richman, Civian, Shannon, Hill, & Brennan, 2008). The desire to stay with employment means employees want to continue to hold the same position in the current organization or at other organizations (Chew & Chan, 2008). The desire to stay in an organization means employees want to stay in the current organization even though they do not hold the same current position (D'Amato & Herzfeldt, 2006; Noraani, Aminah, Jegak, & Khairuddin, 2010; Sheridan, 1992). These two concepts are, on a regular basis, generally used to study the desire to remain from the perspective of workers (Cho et al., 2009; Coombs, 2009).
11 The item used to measures the desire to stay generally measure the desire, planning and the probability of the worker to stay in an organization (Coombs, 2009).
The discussion on the desire to remain is associated with the desire for quit and turnover intention (Lee & Mowday, 1987; Noraani et al., 2010). However, some researchers argue that the desire to remain is a concept contrary to the desire to quit (Mowday & Spencer, 1981).
Turnover intention generally involves a variety of steps or processes including the attitudes, results and behavior elements in which the initial steps of turnover process. Past studies found that the intention to quit is a predictable factor for the employee turnover (Ellenbecker, 2004; Steel & Ovalle, 1984). Spencer (1981), explains that anticipation of the work situation was influencing the desire to quit or desire to remain.
For example, Ellenbecker (2004), finds that the desire to remain, significantly correlated with the retention of employees; Coombs (2009), uses the constructive desire to remain, an alternative to estimate the retention of IT professionals in the United States. An explanation of the relationship between the desire and the behavior of the worker was also explained in the systematic statement of principles which explained that an individual’s behavior was influenced by his/her individual's intention (Ajzen, 1991).
12 Overall, many researchers defined employee retention as desire to stay longer with similar work, or stay loyal with similar organization. At the same time, there is huge debate between the concept intention to quit and intention to stay which naturally is viewed as negative relationship. The process of how employees are motivated and encouraged to remain longer in organization is defined as employee retention (Chaminade, 2007).
According to Cheong, Rahman & Mohyedin (2015), retaining the talented employee is a difficult task for employers nowadays. This is due to the uncertainty of economic or family situations for the employee causing to migrate from one company to a better company. To overcome this situation the employer should implement human resource management practices (Johari, Yean, & Adnan, 2012).
2.3 Selected Human Resource Management Practices 2.3.1 Remuneration, Compensations and Rewards
Past research had highlighted remuneration as one of the strong predictors in retaining employees (Heneman, Tansky & Camp, 2000). The remuneration was explained as salaries, wages, incentives and benefits received by the above employees based on their skills, knowledge and capabilities contribution towards the organization (Martocchio, 2006). According to Odunlade (2012), compensation benefits were one of the main motivations for each employee to perform his/her work very well. This is a vital factor for prospective workers seeking for a job commensurate with their ability. Compensation
13 is one of the rewards offered to employees for their services performed in their organization.
Generally, there are two main rewards, i.e financial rewards and non-financial rewards (Milkovich & Newman, 2005). Financial rewards include salaries and financial incentives such as merit payments, bonuses and allowances. Non-financial rewards consist of medical schemes, status, development opportunities, and rewards (Milkovich
& Newman, 2005). In this study, rewards were reviewed from two aspects, namely financial rewards and non-financial rewards. Monetary remuneration is seen from two aspects namely salary and bonus incentives. Non-financial rewards are viewed in terms of working hour’s elastic. The next section explains the influence of salaries, bonus incentives and time-honors work on the employee to remain in their organization. Salary was a cash financial remuneration paid by an employer on a duty performed by workers in the organization (Milkovich & Newman, 2005). Organization divides the basic salary into two forms of wages and salaries. Generally paid wages based on the number of hours worked, while salaries are accepted on the task regardless of the number of working hours (Bergman & Scapello, 2002). Basic salary is part of the amount of salary determined based on such factors as the value / importance of the work, the skill level, the knowledge, and the scope of the task, and generally not taking into account the difference in employee contributions (Bergman & Scapello, 2002; Milkovich &
Newman, 2005; Tekleab, Bartol & Liu, 2005). In this study, salaries is explained as to how far the employee is satisfied with the basic wages and the sum total of salary
14 (including allowances and monetary remuneration) obtained in organizations (Dreher, Ash, & Bretz, 1988; Sweins & Kalmi, 2008; Williams, Brower, Ford, Williams, &
Carraher, 2008).
2.3.2 Working Environment
Employees are delighted to work in an organization that can promote and care for their physical and mental capabilities. The fun atmosphere added with their other colleagues who are also achieving high potential in their careers. The working environment is an important factor since success in one’s work is determined by it. If the working environment cannot motivate someone to work, then it can lead to failure of an employee in his career. An example of a workplace that is uncomfortable, noisy, scattered, dirty and messy, too narrow, crowded, hot, absence of lifts can make work very unpleasant for the employee. It is not conducive in his workplace and this possibility of leaving his job and moving to another organization is high. In addition, from the point of providing incentives or any form of compensation, attention is needed or prioritization to avoid potential workers leaving the organization. Organization can create a positive working environment apart from money/incentives and other amenities to its staff but a noisy working environment can make the organization regressive. Ramllal (2003), in his study says that it is important to give concern to the organization members to create an atmosphere that encourages them to work better. Creating a fun organizational atmosphere with a more positive and healthy work environment is the responsibility of management. According to Noah & Steve (2012), the quality and a comfortable work
15 environment determines the level of job satisfaction. So this encourages the employee to be more productive and remain in the same organization.
2.3.3 Performance Appraisal
Performance appraisal is defined as process of determination or assessment on staff behavior at the workplace through qualitative and quantitative aspects of job performance by the management (Bagul, 2014). Staff performance appraisal is one of the processes which combine both written and oral elements, whereby management evaluates the employee’s job performance in the work place. One motivating factor for a worker to stay in that organization is when he receives a review of good performance from its organizational management. Performance evaluation staff is a formal process of organization employed towards providing recognition and promotion of employee or employee expansion. To become effective, the process must support the organization in maintaining the employee’s high potential. According to Allen & Griffeth (1999), in their study state that performance appraisal factors can make employees leave their organization when the employee receives a negative response from the performance appraisal report. This may cause them to quit the organization and move to another organization. They feel left out from the organization more in the face of unpleasant circumstances (Vroom, 1964).
16 2.3.4 Training and Development
Organizations should highlight on the growth and progress of their employees if they want them to remain longer in the organization. Workers desire a reasonable development plan for their future. Personnel development and Professional development is essential to individuals in their new home. The employees expect to gain new knowledge, new skills, and work efficiency in the market or organization. That is part of their gift program (Bowen, 2000). Training and development not only provide benefit to the organization but it is also provide benefits to the individual employees (Tahir, Jan and Hashim, 2014). According to Nadeem (2010), employee will be competent and directly improve the organization productivity through the training. Effective internal plan is part of the organization's individual retention. Effective development is a necessary staff retention activity impressed by the organization. Employee development is like a good business gift and other recognitions are part of the entire package (Bowen, 2000).
The study by Herma and Gioia (1998), states that workers are willing to do work not only on the scope of their work but more than that, if there is fun working in an organization.
A study by Princeton, New Jersey states from the 1600 employees, from various major industries that they are studying, state the distribution of their feelings towards their organization was 52 percent want accountability to their job, 42 percent want their contribution recognized, 39 percent want the assignment given in line with their ability.
17 2.4 The Herzberg’s Two-Factor Theory
In this research, the two factor theory has been used as an underpinning to explain the factors which influence employee’s retention. According to Herzberg (1967), this theory is divided into two categories, which is hygiene and motivation factor. The motivation factor is also known as satisfaction, meanwhile hygiene factor is known as dissatisfaction. This theory explains the reason of how an employee, who is satisfied, gradually wants stay longer. Thus, some element in the theory especially salary, working condition, relationship with supervisor, recognition, possibility to grow is part of human resources (IV). Sandra Kumar (2012), in their research found that factors ea. training element, recognition, job security, salary package influences the retention of the employee.
Many cases have shown that extrinsic factors can motivate workers rather than intrinsic factors. Tan and Waheed (2012), and Guha (2013), have mention that extrinsic is more importance than intrinsic factors. Guha (2013), points out that Herzberg’s Model fails to completely explain the motivating factor for the current generation i.e. generation X and Y, but extrinsic motivational factors which influence job contentment and obligation, so they have the intention to leave, which is pointed out by (Pepe, 2014). Tan and Waheed (2012), have mentioned that, motivator of sales personnel job satisfaction were dominated by hygiene factors, which had significant relationship with company commitment. It became a reason for workers to stay in the company which is mentioned by (Samad and Yusuf, 2013). In addition Ramlall (2014), claims that organization should
18 fulfill hygiene factor, deliver motivation such as appreciation, and career advancement so as to retain the key employee.
2.5 Conceptual Framework
This research was adapting a conceptual framework by (Sakinah et al., 2012). Based on her framework the HRM practices are divided into 3 categories, which you know as organizational factor, culture, and benefit factors. The results from her research show that all the 3 factors contribute or influences employee retention. Similar to this study, the researcher used this conceptual framework to create a research framework which explains the relationship between variables. The theoretical framework of the study was demonstrated in the Figure 2.5.
19 Figures 2.5: Basic Structural Model for Retention of Employees (Modified Version of
Herzberg’s Two-Factor Theory. Source: Sakinah et al. (2012)
In this section, independent variables and dependent variable were discussed thoroughly past research. The findings from the past research were used to formulate the research hypothesis.
Based on Sakinah et al., (2012), motivation factors and hygiene factors contribute to the retention of employees. To retain key workers in organization, the management needs to derive an appropriate strategy which includes the recognition, advancement and achievement elements. In addition, attractive fringe benefits will be key factors to
20 encourage workers to stay longer. However, depending on organization strategies factors and benefit factors alone is not sufficient to retain employees. The management should consider the organization culture elements such supervision, working conditions, interpersonal relations and the work.
2.6 Independent Variables Concept
2.6.1 Compensation, Benefits and Rewards and Employee Retention
According to Odunlade (2012), compensations were the one of the main motivation to the every employee to perform in their work and it is important factor that people looking for a job and sit their ability. Financial and non-financial reward paid by employer as a return for the employee’s services was defined as compensation by (Mondy et al., 2005). In addition, Milkovich et al., (2005), says that compensation is different based on level of performance and the value of the job. On the other hand, Philips et al., (2003), claim that the most critical factor to attract, motivate and retain employees was the compensation scheme. However, many organizations do not only utilize compensation system to reward but also apply some fringe benefits to improve the employees’ performance and job satisfaction (Chiv et al., 2002). Traditionally compensation system was the only tool used by the organization to motivate employees towards achieving the organizational goals even though compensation is regarded as one being one of the most expensive in running the business (Bergmann et al., 2001). In addition the outcome of the compensation based on lecturers such as Trevor et al., (1997), found that compensation and benefit provides significant influence on employee retention. If the organization failed to offer an
21 attractive compensation package, very likely the organization may lose some key workers.
Williams and Dreher (1992), claim that the bigger organizations’ provide higher salaries to attract and retain qualified workers. Past research states, money has been argued as a motivator e.g Lowler (1973), at the same time money is also not seen as a motivator (i.e a hygiene factor) suggested by (Herzberg, 1987).
According to Tang et al., (2000a), there are some companies that simply paid high wages and lower benefits to satisfy the employee needs. This is been done due to the different needs on various benefits and on another word, not all the benefits suit the worker entirely. Therefore, some organizations created interesting benefit packages such as cafeteria plan which provides opportunities to choose the best benefits quota.
Reward such as salary, bonus, allowance and non-financial reward was used to attract, motivate and retain the employee to reach the organization goal (Barber and Bretz, 2000;
Chin et. al, 2001; Lazeer, 1998; Milkovich and Newman, 1995; Rynes and Gerhart, 2000;
Tang et al., 1998, 2000 a.b). According to Gerhart and Milkovich (1992), fringe benefits such as pension and holidays satisfy the employees and eventually retain the employees
22 for longer period. The author also claims some employees are offered medical subsides, vacation and retirement schemes.
Randy, Vivienne and Thomas (2002), conducted research on 583 employees randomly selected from bank, management association, industrial association as well as MBA students from different universities from Hong Kong in year 1996. The result shows that basic salary, financial year-end bonus, and profit sharing are vital factors for workers to remain in the same work place. In conclusion, the authors classified Hong Kong employee as “cash mentality”. In addition, it has been found that most Hong Kong workers received a yearly bonus, which was equivalent of a month’s salary in the private sector (Pitts et al., 2011). Better percentage on yearly salary increment has been the determining factor for the employee turnover in organization. It means employee leave the organization if they failed to receive salary increment. In the study Becker and Huselid (1999), suggested attractive compensation can encourage higher commitment and reduce employee turnover. Another study Moncarz et al., (2008), found that employees in hotels seeking higher pay remain longer at the organization. Intel, a US company, paid fixed bonuses, profit sharing and performance incentive to “lock” the key workers. Based on Osibanjo et al., (2014), employees generally are contended with their job if they received attractive compensation, benefits and rewards. Thus, the following hypothesis is formulated:
H1: There is a positive relationship between compensation, benefits, rewards and employee retention.
23 2.6.2 Performance Appraisal and Employee Retention
According to Andrew (2009), to evaluate employees job related behaviors; performance appraisal which is a structured formal system was created to manage the organization’s human resource. The author claims that performance appraisal is an important tool to review the employee’s performance by the organization and make a decision to promote, transfer and layoff (Kusluvan, 2003). Kusluvan (2003), also said performance appraisal is a motivation technique to do performance evaluation towards the employee and the organization. This identified the need for improvement. Past researcher Mondy et al., (2005), indicates the performance appraisal is an evaluation process to assess employee’s performance through evaluating, improving, encouraging and rewarding employees. On the other hand, it is also the method of evaluating the workers’ performance vis-à-vis the organization’s goals. The workers’ performance is evaluated based on the assessment of the workers’ superior or the workers themselves (Jackson & Schuler, 2003). A successful human resource management which is directly related to the goals of organization performance contributes significantly towards Performance appraisal (Erdogan, 2002).
However, according to Lau and Sholihin (2005), unfairness of performance appraisal process by employer contributes to frustration for the employee. Performance appraisal also can be a source of encouragement for the employee due to the Dailey and Kirk (1992), claim that constructive and positive performance appraisal and planning contribute to employee’s views on fairness, thus motivating employees to consider being retained in their companies. According to Saeed, Lodhi and et al. (2013), in their studies,
24 they found that performance appraisal and employee retention are strongly interrelated, when the employer communicated with the employee. Thus, the following hypothesis was formulated:
H2: There is a positive relationship between Performance Appraisal and Employee Retention.
2.6.3 Training and Career Development and Employee Retention
Training and development not only provide benefit to the organization but it is also provide benefits to the individual employees (Tahir, Jan and Hashim, 2014). According to Shore and Coyle-Shapiro (2003), there is a theory by the name of social exchange, introduced by Homans (1958), which explains the cause and benefits occurring during the employee and employer interaction. Example, the more valuable rewards the employee receives more productivity should be provided by him/her. In addition, Homans (1958), also stated that social exchange theory not only involves exchange of tangible material but also intangible value such as prestige. From here the concept of psychological contract was introduce as a continuous process of satisfying both employee and employer relationship. In contacts of employee whose benefit was less received, he/she intends to find alternative ways such as job-hopping. This theory assumes individual will stay in the relationship where there is a strong benefit through interaction.
Therefore failure to receive fringe benefits will result in relationship breakout.
25 This explains the implication of HR strategies towards employee desire to stay with the organization. Furthermore, Homas (1958), highlighted that social exchange theory is culture-bound. Therefore, it will be interesting to see how far this theory adapts to the context of Malaysia’s multi-racial society. It established past research on training and career development towards employee retention. Lew (2011), conducted a study of 202 Malaysian private university employees to determine the HR contribution towards employee commitments. The result of studies shows that current practice of HR system particularly career development program enhances the employees commitment which in the long term makes them to retain with the organization. Tan (2008), conducted a survey on Malaysian academics which revealed that there is a positive link between career development opportunities, promotion, recognition and training, which leads to lower intention to leave.
On the other hand, Budhwar, P.S., and Boyne, G. (2004), have agreed that training could be very costly if the firm failed to hire skilled workers. It means having skilled employee can reduce the training cost. At the same time Kennedy and Daim (2009), identify that many firms in Malaysia seriously lack continuous development training program for the employees. Ng, Lam, Kumar, Ramendran and Kadiresan (2012), maintain that there is a strong vital link between a sound training and development program and retention of Malaysian university lecturers.
26 Based on Storey, J., and Bacon, N. (1993), study claims that employees perceived the training provided is a positive indication of the employer’s responsibilities to their work force. If the employee improves their skill, knowledge and ability from the training, they will increase the productivity. In return, it might increase the remuneration of the other employees. Consequently the employees will be satisfied and decide to stay longer.
According to Zhang (2001), career development is known as a long term process of explaining and experiencing factors such as knowledge, skills, and attitudes in various aspects of a person life. In an organization, the management practice career development as a formal approach to ensure human capital is liable for every level of task. According to Zhang (2001), it is vital for management to realize and understand the employees’
plans about their future work so that they can perform better and minimize the risk of employee turnover. Miller et al., (1992), claim that employees without promotions, opportunities and meaningful work were likely to leave the company, likewise employees who felt themselves engaged, recognized and promoted tended to stick with the company.
According to Medcot and Rumpel (2007), training and career development programs improve employees’ learning experience, performance, management and monitoring ability. According to the author, there are three steps in a training program, which first helps the employee to accomplish organization goals. Next, training provides opportunities to understand the organizational goals. Finally, the training also helps employee to prepare for new challenges in work.
27 Based on Abdull Rahman (2012), an interviewed session found that some of the employees attend the training, not related to their job, such as employees attending random trainings. Based on Mondy et al., (2005), training development is a process for an individual to change their behavior, skills, knowledge and attitude. It’s also known as formal program, which guides the employee in their current and future task. According to Abdull Rahman (2012), in an organization, if staff development program only benefits the employee its will increase the cost of training. This claim was made based on numbers of brain drain from our country.
A previous study also shows that training and career development programs were not available for all the employees, ea. temporary and contract based employees had the least opportunity to participate in training program. Past research (Bassi et al, 1996, 1997;
Ockland et al, 2001; Jones et al 2004; Vorhies et al,. 2000), claim that the rate of employees retention can be lower if the organization increases the training and career development programs. As such, it was hypothesized that:
H3: There is positive relationship between training and career development and employee retention.
28 2.6.4 Working Environment and Employee Retention
According to Martocchio (2013), he defined work environment as a situation where the workers are happy, safe and given the opportunity to fix the work schedule. The author claims good working environment satisfies employees and retain the workers. Flexible working environment creates a satisfying and positive working experience vital for employees to stay longer (Moncarz et al., 2009).
Based on social exchange theory, developing and establishing a conducive working environment was to encourage employee to utilize their skill, knowledge and ability even it is a cost for the organization. According to Kramer and Schmalenberg (2008), an organization, that is less rigid and bureaucratic by nature, is sufficient to implement new changes. In addition, healthy working environment reduces job stress and burnout among the employees. Safe working conditions also contribute to employees’ retention.
According to Hytter (2008), past research mainly focused on working environment based on the industrial perspective ea. noise, labor strike, lay off of factory, supervisor support and chemical exposure.
According to research done by Bush (2001), employees who are working in flexible working hours tend not to leave their jobs compared to the fixed working hour system. In addition, Aida (2014), claims that contented employees are likely to remain longer in the company. According to Salman, Iqbal and Chandran (2010), these claim that HR policies
29 should focus on empowering the employees and avoiding unnecessary job depression. It means the challenges or goal setup by the employer should not create a stressful working culture. Huselid and Becker (2000), working environment which required team based setup enhances employee empowerment and increases the job satisfaction. Thus, empowered employees are more confident in making decisions. Such behavior creates the feeling of obligation to stay in the company for a longer period.
Gowri (2011), stated that employee’s intend to leave their position if they perceived lack of support from their leader, favoritism behavior and barrier in communication with the employees. Based on the statement above below is the formulated hypothesis:
H4: There is positive relationship between working environment and employee retention.
30 2.7 Summary
In this chapter, literature that focused on the relationship between employee retention as the dependent variable and HRM practices, namely compensation, benefits and reward, performance appraisal, training and development, and working environment, as independent variables were reviewed. Based on the literature review, a research framework was devised.
31 CHAPTER 3: METHODOLOGY
3.1 Introduction
The method used in gathering and analyzing data is explained in this chapter. The methodology comprises research design, research framework, questionnaire, population and sampling, reliability and validity analysis, pilot test, data collection and data analysis.
This is a quantitative research which applied survey as tools for data collection. In addition, the researcher applied correlation analysis approach in which the relationship between independent variables and dependent variables is identified.
3.2 Research Framework
Based on the research objective and theory, the research framework below was developed. Sakinah et al. (2012), modified Herzberg’s Two-Factor Theory and used it to explain how the human resource management practices and work environment in the organization are able to manage, develop and retain employees. The rationality of using this theory is based on the relationship that exists between both hygiene and motivation factors towards employee retention. Elements of both these factors are regarded as organizational strategies factors, organizational culture and benefit factors. All the three factors are believed to retain key employees.
32 The Diagram 3.2 explains the relationship between the domains study in this research.
Independent variables Dependent variable
Figures 3.2 Research Framework 3.3 Unit of Analysis
Factors that impact employee retention are identified in this research. Data collection was conducted from Small Medium Company employees in Klang Valley area. The target population consisted of all SMEs comprising fifty or lesser employees. The businesses ranged from event Management Company, apparel, computer shop, book store, clinic, pharmacy, accessories shop, café, flower shop, jewelers, kindergarten, laundry, bakery, printing, salon, tuition center and many more.
3.4 Population and Sampling Technique
The population focus was all SMEs comprising fifty or lesser employees. The businesses ranged from event Management Company, apparel, computer shop, book store, clinic, pharmacy, accessories shop, café, advertisement and printing, and many more. The
Compensation, benefits and rewards Performance appraisal
Training and career development Working environment
Employee retention
33 population would be 200 employees. According to Sekaran (2003), 50% population best fits for sampling size. Therefore, the sample size of this study consisted of 100 selected respondents.
In this study, the random sampling method was applied to determine the sample list. With simple random sampling, there would an equal chance (probability) that each of the population in an organization could be selected for inclusion in the sample (Ary et al., 2002). It is a fair decision based on a sample selection from the population. One of the aims of the investigation is the ability to make conclusions deriving from the sample results relating to the population. There are three common simple random sampling methods: computer program, fishbowl draw, and a table of randomly generated numbers.
The researcher used a computer program as a sampling method. Chosen names were entered into SPSS, and the system random selected 100 potential candidates.
3.5 Research Instrument
A questionnaire which was standardized, structured and self-administered was used to collect data. The details of the questionnaire used in this study are explained in the following section. Almost every researcher uses questionnaire as a research method for their study due to its range, larger segments of the population are involved and there is consequent reduction in distribution as compared to other methods. Questionnaire is the best method for investigation and clearly outlines the desired responses are clearly.
34 There are many advantages in the usage of questionnaire. Particularly when it is administered collectively to a study population, it is also a method that saves time and energy for the researcher in collection and analysing the data. Besides being able to accelerate the process of gathering information because it is more organized and systematic, respondents find it easy to understand. In addition, this method also offers greater anonymity and higher confidentiality. As there is no personal encounter between respondents and interviewer, this method provides greater privacy, especially for sensitive questions. More accurate information can be obtained in this way.
Questionnaires would comprise a reformulated written set of questions. Respondents would than record their answers, usually within rather closely defined alternatives.
Measurement scale for section B, C, D, E and F are based on a Likert Scale of 1 to 5, where for is 1=strongly disagree, 2=disagree, 3=neutral , 4=agree 5=strongly agree. A sample of questionnaire used in this study was presented as Appendix 1.
3.6 Measurement of Variable
According to Fisher et al. (2004), the ‘working definition’ of concepts used to measure specific variables is referred to as operationalization which clarifies the meaning of variables in the context of research (Babbie, 1998). Hence, this operationalization is a significant step in doing research methodology because it enables the researcher to formulate the appropriate measurement. The measurements and instrumentations that
35 were used in the research questionnaire are explained as follows. The sources of the instruments were summarize as in Table 3.6,
Table 3.6: Instruments
Variable Section Total number
of items
Scale Source
Compensation,
Benefits and
Rewards
A 7 Likert
Scale 1-5
(Moncarz, Zhao, and Kay, 2009) Performance
appraisal
B 7 Likert
Scale 1-5
(Snell, 1992) Training and Career
Development
C 7 Likert
Scale 1-5
Broadfoot and Ashkanasy (1994) Working
Environment
D 7 Likert
Scale 1-5
(Moncarz, Zhao, and Kay, 2009)
Employee Retention E 7 Likert
Scale 1-5
(Cammann, Fichman, Jenkins, and Klesh, 1983)
3.7 Pre-testing of Research Instrument
Before distribution to the target group, the reliability and validity of the questionnaire was pre-tested. This was to ascertain whether the questions in this questionnaire are formed accordingly and logically in response to the research objectives. 15 respondents comprising seven male and eight female business owners from Hulu Langat were selected to do the pre-testing. The researcher personally handed the questionnaires, after which the fifteen respondents were briefed regarding the objectives of this pre-test. The
36 format, clarity of items, instructions, readability, and specificity of the words and other general comments were posed to the respondents by the researcher. After receiving the feedback, relevant improvements, and corrections were undertaken to improve the quality of questionnaires. Cronbach’s Alpha was used to carefully study and assess the feedback from the pre-test.
To measure the internal consistency of the instruments, Cronbach’s Alphas were calculated based on the fifteen respondents. Ary et al. (2002), claim that Cronbach’s Alpha which is a reliability estimate is widely used to measure consistency. George and Mallery (2003), advised that practice rather than theory to interpret the Cronbach’s Alpha are as such: α > 0.9 (excellent), α > 0.8 (good), α > 0.7 (acceptable), α > 0.6 (questionable), α > 0.5 (poor), and α > 0.4 (unacceptable).
3.7.1 Reliability
Thomas and Smith (2003), referred to the degree of consistency of the measurements as Reliability. They have to be consistent over time and representative, giving similar results on varying units of analysis. The exactness or correctness of the measure is termed as its validity. According to Thomas and Smith (2003), the measure is required to be valid not only superficially, but also needs to measure the nature of the entire phenomenon.
37 Prior to the actual study, these two concepts were assessed. In the reliability testing, two tools were used. They were:
i. The item-scale correlation - this serves to select scale items that are inconsistent with the others, and
ii. The alpha coefficient – this serves to evaluate the scale’s overall degree of internal consistency.
Both tools were decisive in eliminating or maintaining any item from the scale. The basis for this decision was that the items that have a lower item-scale correlation have to be excluded only as long as this operation produces an increase in alpha. Reliability tests were carried out on the instruments used for pre-testing and the important study to compare the process. According to Smith and Thomas (2003), reliability is the degree of appliance to appraisal producing steady and consistent result with the score’s consistency.
Cronbach’s alpha value of more than 0.6 was used as acceptable value in indicating reliability mentioned by (George and Mallery, 2003). The questionnaire was modified after receiving suggestions and comments. Table 3.7.1 showed that the pre-test reliability values were greater than 0.7, thus demonstrating that each of the scales was reliable in measuring the variables.
38 Table 3.7.1: Reliability Estimates for the Instruments in the Pilot-test (n=15)
Section Scale Total Items α Pilot-test
B Compensation and benefits 7 0.947
Training and Development 7 0.954
Working Environment 7 0.955
Performance Appraisal 7 0.944
C Employee retention 7 0.812
3.7.2 Validity
Face validity and content validity are derived from validity. Face validity is understood as items in the instruments which appear to measure what they are supposed to measure (Anastasi, 1988). Content validity which is a theoretical notion questions whether the indicator/s selected reveals a particular concept that actually covers the whole domain of the meaning of the concept (Corbetta, 2003). Face validity indicates that both the researcher and the supervisor, having read all the selected instruments, have verified that all instruments measuring the constructs are involved in this research. On the other hand, for content validity, the researcher used only subject-matter experts and employees (Malaysia private organization). Corbetta (2003), suggested that validation procedures, such as construct validity and criterion-related validity were inappropriate because the instruments used were derived from validated, established and well-accepted instruments.
39 3.8 Data Collection
A formal survey using a structured questionnaire consisting of 35 items as shown in the Appendix A was used for this study. The pre-tested questionnaire had been improved on the instruments to guarantee that available instruments possessed high internal consistency. Eventually, selected respondents received the definite version of the questionnaire which was distributed to them. The drop and collect method was used to collect data. An application letter seeking approval to conduct the research in selected organizations from the Human Resource Department was sent by the researcher (see Appendix B). The permission of unit heads, as well as the cooperation of workers was sought. Before questionnaires were distributed, respondents received proper instructions to the completion the questionnaire.
Human Resource Managers in some organization administered the entire questionnaires throughout the survey. Respondents were briefed regarding (i) the objective of the questionnaire (ii) confidentiality and anonymity of their responses (iii) assurance that the instrument is not a test - having no right or wrong answers – was given to the respondents. Questionnaires were then distributed to the related, ‘cooperative’ human resource personnel who would then further distribute the questionnaires to the selected respondents. Completed questionnaires were collected by the human resource personnel after two to three weeks’. Due to the internal distribution of the questionnaires, the researcher depended greatly on the officer’s cooperation to ensure that selected respondents only received the questionnaires. To maximize the increase of response rates,
40 several phone calls were made by the researcher to the relevant human resource personnel to confirm that the questionnaires were distributed and collected within the specified time frame. In the end, the researcher collected the completed questionnaires from the human resource personnel in the company within the time given. The total number of responses which were finally used for data analyses in this research was 100.
3.9 Data Analysis Techniques
All the data collected were coded and entered into the computer to analyse using Statistical Product and Service Solutions (SPSS) version 22 software. Prior to the data entry, each individual questionnaire was assigned a specific ID so as to expedite future tracking of each questionnaire. Descriptive analysis and bivariate analysis were used to meet the objectives in the analysis of the data. Descriptive used to measure frequency, mean, and standard deviation of demographic profile, level of employee retention and level of human resource practices. To define the relationship between human resource practices and employee retention Pearson Product-Moment Correlation Coefficient was used. Before proceeding with data analysis, it is important to scrutinise the data or to run the Exploratory Data Analysis.
3.9.1 Exploratory Data Analysis
Data analysis is always a detailed examination of the data, or it can be also called Exploratory Data Analysis (EDA). According to Field (2005), EDA is used to pinpoint
