The Impact of Human Resource Management Practice on Financial Performance: Evidence from FTSE Firms in the UK

Human Resource Management Practice (HRMP) is an area of concern to employees, organizations, as well as the government, and policymakers. Organizations, practitioners, and researchers are confused about whether HRMP is a cost burden to organizations, or positively influences financial performance because of different results obtained by researchers. The aim of this research is to empirically examine the relationship between HRMP disclosure in the UK and how it impacts financial performance (FP). In doing so, the individual categories of HRMP disclosures (financial reward, training and development, growth and promotion, recruitment and selection, working environment, and communication and engagement), as well as all the categories combine, were examined to establish their relationship with FP. With the application of Social Exchange; Stakeholder; and Ability, Motivation, and Opportunity (AMO) theories, the study further examined whether board size or board independence moderates the relationship between HRMP and FP and disproved the assumption that a linear relationship exists between HRMP and FP.
Content analysis of a sample of UK 335 Financial Time Stock Exchange (FTSE) firms’ annual reports were used to investigate HRMP disclosure and their impact on FP proxy of ROA and market capitalization using data from 2016 to 2021. A well-defined checklist for the categories of HRMP was developed whereas HRMP disclosure indices were calculated. The FP measures were obtained from AMADEUS while the corporate governance variable was picked from the Refinitiv database. The relationship between HRMP and FP was modelled with GMM panel regression technique assisted by the panel regression model, OLS as a robustness test to check for the credibility of the results.
The results showed a positive significant relationship when HRMP are combined. However individual HRMP showed different results with the dominance of negative relationships. This supports the theoretical expectations of the AMO model which confirmed that for performance to be achieved there should be a bundle of HRMP comprising ability, motivation, and opportunity. It further proved that the relationship between HRMP and FP is not linear but rather an inverted U-shape relationship. This implies that moderate HRMP maximizes FP. In addition, it was found that board size is negative, and significantly moderates the relationship between HRMP and both FP measures (ROA and market capitalization). However, board independence had positive moderation effects on HRMP and FP (ROA and Market Capitalisation), while ROA was significant, market capitalization was not significant. The study offers implications for theory, practitioners, pedagogy, policy, and offers opportunities for future researchers. The study shows that large board size is not good for FTSE firm. It was further suggested that organisation who want to increase their HRMP for it to increase FP should increase the percentage of their outside directors. It was further suggested that perpetual increase in HRMP may not bring constant financial benefit.