Human Resources Strategy

Human resources strategy includes several major factors

  1. Recruitment and retention;
  2. Compensation;
  3. Performance management
  4. Training and development
  5. Succession planning.

Recruitment and Retention

Many small businesses hire at the entry level, provide on the job training, and develop an internal labour market, although on a small scale. Therefore, person-group fit and person-organization fit are very important because of the small size and close culture typically found in a small business. Interestingly, research indicates that job satisfaction is higher for employees of smaller companies than of larger companies (CFIB, 2004).

The owner is actively involved in all recruiting and hiring decisions. Sometimes, hiring is done in a rush in an attempt to maintain or increase productive capacity and the consequences can be negative. The employer may believe that anyone is suitable to fill an entry-level position and that fit is not an important criteria at the entry level. The urgency to resolve the short-term problem of production capacity and hiring someone with poor fit may result in either another turnover or potential long-term conflict and culture problems, both due to lack of fit. The majority of human resources problems that I help clients resolve are due to lack of fit, especially at the person-group level. It is my experience that a poor fit will have negative consequences on the entire group and create more serious human resource problems than problems that a short term lack of productive capacity from a shortage of personnel may cause.

Person-job fit is also important because an employee is typically required to perform a variety of tasks in a small business (Higgins). There is significant task ambiguity and constant pressure to perform in a small business. I have found that the pride small business owners and employees have in their work – both the quantity and quality – appear to be an intrinsic reward for them. This seems to offset the slightly lower compensation they may receive compared to employees of larger organizations (CFIB, 2004). Part of this is due to economics because the small business cannot afford to pay for excess capacity. This lack of financial resources creates another problem because a business needs excess capacity – in financial, operational and human resources – if it desires to pursue a growth strategy. Excess capacity conflicts with the owner’s values of keeping everyone busy all of the time.


Compensation presents several challenges for the small business. Firstly, a profitable small business is able to pay competitive wages and provide benefit plans. However, an unprofitable or under-performing business may not have the financial resources to compensate a good employee. This increases the difficulty in recruiting and retaining qualified employees and this creates a vicious cycle (Baron and Kreps, 1999). Higher profitability provides additional resources for better quality hires that can continue to grow increase profitability. Lower profitability results in fewer resources for hiring and training. This results in lower performance and thus perpetuates the low profitability.

Paying above-market wages has many positive results for a business including “lower rates of absenteeism, (lower) disciplinary discharge and discharge, as well as greater job satisfaction and performance” (Baron and Kreps, 1999: 5). However, paying higher wages is not guaranteed to solve all HR problems. Consider this comment from a Princeton economist: “[Unexpectedly], it appears that changing the way workers are treated may boost productivity more than changing the way they are paid, although profit sharing and employee stock ownership combined with worker participation may be the best system of all” (ibid). Changing how workers are treated in a small business can provide a small business with competitive advantages in terms of production efficiency, quality and cost compared to larger businesses where it is more difficult to change how workers are treated. For example, by considering employees as investments instead of expenses, small business can invest in improving the productive capacity and profitability of their expenses. This HR focus shows the higher value of maximizing ROI vs. a cost-minimization focus.

Performance Management

Active owner involvement in operations, at this stage of the business cycle, provides an ongoing measurement of performance. The objective at this business stage is to grow to the next level. This requires delegation of hands-on management to others and changes in performance management. One common weakness in many small businesses is a lack of an integrated management information system that can provide information about the business at a more sophisticated level than the basic accounting system typically can. A basic accounting system can, with slight modifications, provide very important information about critical success factors (CSFs). CSFs, and their measures, key performance indicators (KPIs), are highly relevant for managers because they can measure and provide feedback on strategic effectiveness. However, small businesses at this transition stage may tend to focus on sales and may believe that more sales will solve their problems. Sales is an external focus. It is often easier to improve results by focusing on internal factors, including training and development of employees.

Training and Development

As specified earlier, educational institutions primarily focus on producing employees for larger organizations. Therefore, the job of training small business workforces falls upon the small business. In my opinion, the lack of small business management training at the university level may contribute to the under-performance faced by small businesses. The resource pool for small business managers is not very large, even though the sector is a significant part of the economy. Indeed, in conducting the research for this paper, there are few bodies of knowledge on small businesses and few universities which have extensive research, programs or information. Training and development will continue to be challenges for small business owners.

Fit is critical in a small business where on-the-job training and interdependence of employees are used in place of standardized operating procedures and extensive manuals usually found in larger businesses or franchises. Retention is also critical because of the significant time and expense involved in selecting an employee that fits with the culture and in providing the extensive on-the-job training. Training reduces production and profits during the training periods because the training is provided by senior people.


Succession is a major issue and a major opportunity for all business owners. Succession relates significantly to the owner’s exit strategy from the business and the preservation and transfer of wealth that the owner created in the business. Consolidation in some industries offers some business owners a way to divest their businesses, and perhaps even retain a management role within the business after divestiture. Other methods of divesting the business include selling it to family members, to employees or to third parties. Financial factors that affect the selling price of a business typically include net asset values, cash flows and earnings.