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16 JOURNAL OF SMALL BUSINESS MANAGEMENT

Formal Human Resource ManagementPractices in Small Growing Firms*by Bernice Kotey and Peter Slade

Using data from micro, small, and medium firms in Australia, the paper exam-ines the rate of adoption of formal human resource management (HRM) practiceswith increasing firm size. The results demonstrate a move toward division of labor,hierarchical structures, increased documentation, and more administrativeprocesses as the number of employees increase. The adoption of formal practicesbegins early in the growth process, initially at a rapid rate (as a significant per-centage of firms implement these practices) and then at a slower rate (as fewer newfirms adopt the formal practices). At smaller business sizes HRM practices are lessformal for managers than for operatives. The paper concludes that static modelscannot be used to portray HRM practices in small firms and that management train-ing and advice for small firms must recognize the diversity of practices associatedwith various firm sizes.

*The authors are grateful to Dr. Harry Kibbler for his review of the paper.Dr. Kotey is senior lecturer in the New England Business School at the University of New

England, Armidale. Her research interests cover management and performance issues in smalland medium-sized enterprises (SMEs) and family business and small business education.

Dr. Slade is senior lecturer in the Faculty of Business at the University of the SunshineCoast. He has interests in labor economics and industrial relations, technological change, theeconomics of crime, and gambling.

IntroductionIt is recognized increasingly that small

and medium-sized enterprises (SMEs) arecomplex, varied, and influenced by arange of factors (Wagar 1998; Loan-Clarke et al. 1999) and thus cannot bedepicted by static models (Baron andKreps 1999; Reid and Adams 2001). SMEsencompass firms of various sizes withvarying degrees of complexity in man-agement practices. However, they oftenare treated as one entity. Management

training and advice to SMEs is basedlargely on textbook prescriptions thatrequire the adoption of formal manage-ment procedures more suited to largefirms. Trainers and advisers often fail toinvestigate the degree of formalityalready established in the firm and theimplications for the firm’s competitive-ness before prescribing changes to exist-ing practices. This is particularly true forhuman resource management (HRM)where practices in SMEs generally are

Journal of Small Business Management 2005 43(1), pp. 16–40

described as “informal” (Ritchie 1993;Kotey 1999; Wilkinson 1999).

Katzell (1962) argued that no onesystem of organization and managementcan serve as a blueprint for all organiza-tions. He identified certain genotypicdimensions, including organizationalsize, and the degree of interaction andinterdependence of organizational mem-bers, as determinants of variation andcomplexity in organizational practicesand activities. Following Katzell’s (1962)suggestion, firm size as well as the strate-gic implications of increasing size mustbe considered when defining appropriatelevels and areas of formal HRM practicessuitable to each firm. Blau (1970, 1972)noted two broad trends as organizationsincrease in size. The first is increasingdivision of labor, leading to greater hori-zontal and vertical differentiation. Thesecond is that as size expands, differen-tiation increases—at first rapidly but thenmore and more slowly.

The need to examine the interactionbetween firm size and HRM practices isgaining recognition among researchers(Heneman, Tansky, and Camp 2000). Thispaper investigates the extent to whichHRM practices become formal as firmsprogress in size and the implications ofthe changes for effective and competitiveHRM practices. The HRM practices exam-ined are recruitment and selection, train-ing, performance appraisal, developmentof human resource (HR) policies, andmaintenance of HR records. Kaman et al.(2001) noted that these are HRM areasprone to increased formalization withfirm growth.

Literature Review andHypotheses Development

In this study, the word formal refersto prescribed practices—that is, practicesgenerally approved in the literature asappropriate for the various HRM areasexamined. In this regard, it extendsbeyond documentation and standardiza-tion of procedures, roles, and instruc-

tions to include legitimate sources ofrecruitment and the use of specialists for training. From Katzell’s (1962) con-tention SMEs of varying sizes shouldexhibit various levels of formality in theirHRM practices.

Consistent with Katzell’s (1962)propositions, Hornsby and Kuratko(1990) examined HRM practices of smallU.S. firms in three size categories andreported increased sophistication inpractices with firm growth. Roberts, Saw-bridge and Bamber (1992) argued thatthe limits of informality become appar-ent in firms with 20 or more employeeswhen informal networks of recruitmentdry up and when informal styles of man-agement communication are stretched.Jennings and Beaver (1997) noted that atthis size the owner becomes overex-tended and needs to delegate responsi-bility to more professional management.In contrast, Wilkinson (1999) argued thatemployment relations in SMEs are char-acterized by informality and that formalcontrol systems and communicationstrategies are almost nonexistent. Hemaintained that emphasis on rules andprocedures is outdated in an environ-ment where owners have to make speedydecisions in response to market pres-sures. Golhar and Deshpande (1997)found similarities among small and largefirms in many areas of HRM practices.These contrasting views make it difficultto understand existing HRM practices inSMEs and to prescribe appropriate prac-tices for these firms. The result is a “one-size-fits-all” approach to HRM trainingand advice for SMEs.

Recruitment and SelectionIt is expected that as firms grow, the

skills and abilities required to performvarious functions and activities no longerwould be available from the familiar andinformal recruitment sources preferredby the owner-manager. Thus, a greatervariety of formal recruitment sourceswould be used to attract suitable candi-

KOTEY AND SLADE 17

dates. Hornsby and Kuratko (1990)reported extensive use of newspaperadvertisements, government and privateemployment agencies, employee refer-rals, and unsolicited applications amongsmall firm recruitment practices. Theirfindings are consistent with Barber et al.(1999), who established increased use offormal hiring procedures as firms grow.In contrast, Marlow and Patton (1993)and Carroll et al. (1999) found thatrecruitment in U.K. small firms is mainlythrough informal channels and networksbased on previous knowledge of theindividual by the owner, management, ortrusted employees. Carroll et al. (1999)cited Atkinson and Meager (1994), whodetermined that for very small firms,knowing the individual is virtually a pre-condition for recruitment and that infor-mal methods of recruitment remainpredominant as firms grow. Marlow andPatton (1993) explained that SMEs preferinformal recruitment sources becausethey are cheaper.

As firms grow, multiple selection tech-niques would be used, in addition tointerviews, to reduce errors in selectingemployees recruited from sources unfa-miliar to the owner-manager. Golhar andDeshpande (1997) demonstrated thatone-to-one interviews are the mostpopular selection techniques in bothsmall and large firms, with large firmsalso likely to use written tests and panelinterviews in the selection process.Hornsby and Kuratko (1990) reportedincreasing prominence of applicationforms and reference checks in the selec-tion process as firms increased in size.Barber et al. (1999) determined thatlarger SMEs tend to rely on objectivequalifications and tend to use a greaternumber of selection procedures inmaking hiring decisions. Rowden (2002)found that technical skills and positivework ethics received high priority in theselection processes of several of the suc-cessful small manufacturing and pro-cessing firms in his sample.

Other researchers report that in SMEs,the one-to-one selection interviewsemphasize “fitting in,” with little attentionto paper qualifications or previous workrecord (Bird 1989; Carroll et al. 1999;Heneman, Tansky, and Camp 2000). Con-sequently, “good” potential employeesare not selected because they may beperceived as a threat to the valued inde-pendence of the owner-manager (Stan-worth and Curran 1989). While fitting inwould continue to be emphasized as aselection criterion as firms grow, atten-tion also will be given to skills and abil-ities of candidates.

The adoption of formal employmentprocedures at the managerial level willlag behind that at the operational levelfor small firms, as owner-managersprefer to employ the few managersrequired from family and friends. Thisdifference is expected to diminish withfurther growth, as these familiar sourcesno longer are able to cater to the spe-cialist skills required. The contention thatHRM practices will become formal withfirm growth suggests the followinghypotheses:

H1: A greater variety of formal recruit-ment sources is employed with firmgrowth.

H2: Screening of candidates is intensi-fied through the use of multiple selec-tion methods as firm size increases.

H3: The application of formal employ-ment procedures at the manageriallevel lags behind that at the opera-tional level for smaller firms.

Training and PerformanceAppraisal

Training in SMEs has been describedas informal and on the job, with little or no provision for management devel-opment (Marlow and Patton 1993;Storey 1994; Loan-Clarke et al. 1999).MacMahon and Murphy (1999) noted


that SMEs rarely carry out formal training-needs analysis and have no systematic approach to training. Trainingoften is perceived as an unaffordableluxury involving not only course fees butalso the cost of unproductive labor.Owner-managers argue that trainingresults in highly specialized staff, asopposed to the multiskilled workforcerequired to cope with the highly flexiblenature of jobs (MacMahon and Murphy1999). In contrast, Hornsby and Kuratko(1990) reported the use of a variety oftraining methods in small firms with on-the-job training being the predominantmethod. In very small firms, owner-managers perform most business activi-ties themselves or directly supervise the performance of these activities(Timmons 1999). Thus, they take directresponsibility for employee training andteach their preferred methods of doingthings.

Hornsby and Kuratko (1990) foundthat performance appraisal varies by firmsize and industry sector. They identifiednarrative descriptions of employee per-formance, assessment of their ability tomeet targets, and the use of rating scalesas appraisal methods that increased inprominence with firm size. In contrast,MacMahon and Murphy (1999) arguedthat owner-managers usually lack theskills necessary to carry out effective per-formance reviews and may perceiveformal performance appraisal systems astime consuming. In very small firms, per-formance appraisal would be informaland continuous as owner-managersdirectly control all activities (Mintzerg,Quinn, and Voyer 1995). As the span ofcontrol increases, it is expected thatappraisals would be more formal andoccur at longer intervals.

Following textbook prescriptions,middle managers are required to takeresponsibility for daily operations of thefirm and to supervise operational staff asthe number of employees and span ofcontrol increase (Collins and McLaughlin

1998). Lavarack (1995) argued that theability to recruit extra staff and to dele-gate some responsibility to them is oneof the most important skills for businessgrowth. In reality, owner-managers havedifficulty in trusting employees and arereluctant to delegate work (MacMahonand Murphy 1999). This leaves owner-managers too busy to devote time tostrategic roles.

As firms grow, it is expected that train-ing and performance appraisal of opera-tional staff will be delegated to middlemanagers. To control performance effec-tively, owner-managers would shift theiremphasis from operational staff tomiddle managers. This means they needto pay greater attention to training,development, and performance appraisalof managers to ensure that managersdevelop the skills and abilities necessaryto perform their responsibilities. The pre-vious discussion on training and per-formance appraisal in SMEs wouldsuggest the following hypotheses:

H4: On-the-job training is the predomi-nant training method in SMEs.

H5: Other training methods becomemore prominent as firms grow.

H6: Development of managerial staff isgiven greater attention with firmgrowth.

H7: Responsibility for training and per-formance appraisal of operationalstaff is delegated increasingly tomiddle management with firm growth.

H8: Performance appraisal of manage-rial staff receives greater emphasiswith firm growth.

Human Resource Policies and Records

Kotey (1999) stated that few owner-managers have formal and professionalpolicies on human resource-relatedissues such as promotions, incentives,

KOTEY AND SLADE 19

and disciplinary action. The lack of HRpolicies coupled with nepotism andcronyism raise questions of fair treat-ment of all employees (Bird 1989). SMEemployers believe their family orienta-tion ensures that employees are treatedfairly, that employee loyalty is encour-aged (Rowden 2002), and that explicitHR policies are rendered unnecessary(MacMahon and Murphy 1999). How-ever, Adler and Borys (1996) suggestedthat increased formal policies and pro-cedures could reduce employee rolestress and could facilitate greateremployee commitment.

Job descriptions in small firms arevague because over time jobs change ordevelop and employees often create theirown jobs (Holliday 1995). Carroll et al.(1999) found no evidence of systematicjob analysis in U.K. small firms. Theynoted that managers perceive jobdescriptions to be too rigid, restrictingthe flexibility of their firms. In contrast,MacMahon and Murphy (1999) reportedthat poor job descriptions lead to roleconflicts and employee frustration. Inmany cases, both employers and employ-ees are ignorant of their roles, rights, andobligations.

In very small firms, direct control bythe owner-manager reduces the need for detailed documentation and account-ability. Although limited documenta-tion of policies and procedures leads toinconsistent application of HRM prac-tices, it does provide flexibility in adapt-ing to change (Mintzberg, Quinn, andVoyer 1995). As employee numbersincrease, procedures will need to bestandardized for consistent and efficientapplication and fair treatment of employ-ees (Child 1972). The introduction ofstandardized practices will induce theestablishment and documentation of HRpolicies—a practice likely to increasewith firm size. Documentation alsowould be required for purposes ofaccountability as owner-managers losedirect control of operations with firm

growth. Documentation includes main-taining employee records required forstatutory purposes and for evidence inthe event of litigation. The followinghypotheses are developed for testingbased on the previous discussion.

H9: Documentation of human resourcepolicies and procedures increaseswith firm size.

H10: More firms will maintain recordson employees as firm size increases.

MethodologyDefinition of Small and Medium-Sized Firms

The Australian Bureau of Statistics(ABS) defines a firm as small if itemploys less than 20 workers andmedium if it has up to 199 employees,regardless of the industry sector in whichit operates (Office of Small Business1999). Small firms are classified furtherinto micro firms (if they employ less thanfive workers) and small firms (if theyhave between 5 and 19 employees).These classifications (micro, small, andmedium) were used in this research withthe exception that medium-size firmswere restricted to those employing up to100 workers (see next paragraph).

Sample and Data CollectionThe research was based on a survey

of 1,330 micro, small, and medium firmson the Sunshine Coast region of South-east Queensland. The Sunshine CoastEconomic Development Board (SCEDB,1996) maintains a database of small andmedium-size firms in the region, whichit updates frequently. All the firms in the1996 database were surveyed with theexception of one firm—the BuderimGinger Factory, then a public companyand the only firm in the database withmore than 100 employees. This firm wasexcluded from the study to avoid dis-torting the results.


Data for the research was obtainedfrom a mail survey of firms in thesample.1 The eight-page questionnairecovered general information on the business, demographic details of respon-dents, recruitment and selection prac-tices, performance appraisal, trainingmethods, and HR records and policies.The average number of employees in thevarious size categories is shown in Table1. The table also presents number ofemployees in managerial and operationalpositions and under various employ-ment contracts (full time, part time, andcasual).

Measurement of VariablesBusiness details such as employee

numbers, positions, and contract length,as well as number of business locations,were measured at the ratio level. Respon-dents were asked to indicate the numberof employees in each position andemployment category (that is, manage-rial and operatives; full time, part time,and casual) and the number of businesslocations. The questions for the otherbusiness characteristics and respondents’(owner-manager) details were closeended and were measured by nominalscales. Respondents were asked tochoose among a number of alternativeanswers those corresponding to theirresponses to each question. Examplesinclude gender (male or female); methodof business acquisition (purchase, inher-ited, started); and work experience (ownbusiness, family business, other privatebusiness, public companies, governmentorganization).

Most of the HR practices examinedwere measured at the nominal level. Alist of recruitment sources, selection

techniques, and training and appraisalmethods were defined, and respondentswere asked to choose those that corre-sponded with their practices separatelyat the operative and managerial levels.Five-point Likert scales were used tomeasure variable items such as provisionof orientation training, use of applicationand appointment letters and/or forms,and three-point Likert scales were usedto measure items such as maintenance ofrecords on employees, job descriptions.A copy of the questionnaire showing thequestions asked and response format canbe seen in the Appendix.

Analytical TechniquesOne-way analysis of variance

(ANOVA) was used to examine differ-ences in HRM practices of employers inthe three size categories for variablesmeasured at interval and ratio levels.Variables measured by nominal scaleswere analyzed using chi-square tests.Where significant differences were indi-cated by ANOVA, differences betweenthe groups were examined using Tukeytests of significance of difference tocontrol for type-1 errors. Similarly, wherechi-square tests indicated significant dif-ferences among the three groups, the differences were investigated further byseparate chi-square tests for micro andsmall firms and for small and mediumfirms. Differences in the adoption offormal HRM practices at the managerialand operational levels were examined forthe three size categories using Wilcoxonsigned ranked tests.

ResponseThree hundred seventy-one2 useable

responses were received out of the 1,330

KOTEY AND SLADE 21

1It was not possible to carry out a fully stratified random sample of firms in these size cate-gories due to lack of information on employment sizes in the database from which the samplewas drawn. However, the responses reported next show reasonable representation of all sizeand industry groups.

2This was the final response after a mail follow-up was conducted.

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Table 1 Firm Characteristics—Employees and Number of Locations: Results of ANOVA and

Multiple Comparisons

Variables Business Group Means F-value Significance Comparison of Means

1–2 1–3 2–3(significance) (significance) (significance)

Full-Time Micro (1) 1.9 -4.88 -21.69 -16.81Employeesa Small (2) 6.8 150.69 0.000 (0.000) (0.000) (0.000)

Medium (3) 23.6

Part-Time Micro (1) 0.58 -0.46 -3.42 -2.95Employeesa Small (2) 1.05 11.99 0.000 (0.748) (0.000) (0.000)

Medium (3) 4.00

Casualsa Micro (1) 0.79 -1.11 -9.65 -8.53Small (2) 1.90 43.16 0.000 (0.479) (0.000) (0.000)Medium (3) 10.43

Percentage of Full- Micro (1) 0.61 -0.08 -0.03 0.05Time Employees to Small (2) 0.69 2.18 0.114 (0.11) (0.74) (0.54)All Employeesa Medium (3) 0.64

Total 0.66

Percentage of Part- Micro (1) 0.17 0.06 0.08 0.02Time Employees to Small (2) 0.11 2.98 0.05 (0.13) (0.05) (0.65)All Employeesa Medium (3) 0.09

Total 0.12

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Percentage of Micro (1) 0.23 0.03 -0.04 -0.07Casuals to All Small (2) 0.20 1.53 0.22 (0.73) (0.68) (0.20)Employeesa Medium (3) 0.27

Total 0.22

Operational Staff a Micro (1) 2.26 -4.80 -26.58 -21.79Small (2) 7.06 188.79 0.000 (0.000) (0.000) (0.000)Medium (3) 28.84

Managerial Staff a Micro (1) 0.60 -1.26 -4.12 -2.85Small (2) 1.86 82.01 0.000 (0.000) (0.000) (0.000)Medium (3) 4.70

Percentage of Micro (1) 0.81 0.02 0.00 -0.02Operational Staff to Small (2) 0.79 0.366 0.69 (0.78) (1.00) (0.77)All Employeesa Medium (3) 0.81

Total 0.80

Percentage of Micro (1) 0.19 -0.02 0.00 0.02Managerial Staff to Small (2) 0.21 0.366 0.69 (0.78) (1.00) (0.77)All Employeesa Medium (3) 0.19

Total 0.20

Number of Businesses Micro (1) 1.16 -0.24 -0.98 -0.74in Other Locationsa Small (2) 1.41 11.74 0.000 (0.349) (0.000) (0.000)

Medium (3) 2.15

aVariables measured at ratio level.

questionnaires sent—a response rate ofabout 28%. This response is consistentwith similar HRM surveys involving smallfirms (for example, Deshpande andGolhar 1994). Nevertheless, to addressthe possibility of nonresponse bias, thefinal wave of respondents (to surrogatelate respondents for nonrespondents)was compared to the initial respondentswithin each size group. Chi-square and t-test statistics revealed no significant dif-ferences at the 5% level for any of thevariables in the study.

Of the 371 responses, 84 (22%) weremicro firms, 211 (57%) were in the smallfirm category, and 76 (21%) weremedium-sized firms. A comparison ofbusiness characteristics between thisregional sample and national samples offirms in similar size categories showedno significant differences (DIST 1998).

DiscussionSample Characteristics—BusinessDetails and Demographics ofOwner-Managers

On average, medium-sized firmsemployed significantly more permanent(full-time) and flexible (part-time andcasual) staff than both micro and smallfirms (Table 1). There were significantlymore full time workers in small firmsthan in micro firms (Table 1), but thenumber of part time and casual staffwere similar for both firms. The percent-ages of permanent and flexible staff weresimilar for the three groups, with theexception that medium firms employedrelatively more part-time staff than micro firms. An appropriate mix of full-time and flexible staff is necessary foreffective labor cost management. Full-time employees provide the stability inoperations required for permanentgrowth and staff on flexible contractssupports temporal fluctuations in growth(English 2001). The average ratio of per-manent to flexible staff was 2 to 1 (Table1). The number of employees at bothoperational and managerial levels

increased significantly across the threefirms. However, the ratio of one managerto four operatives was maintained for allfirm sizes. This means additional mana-gerial staff was employed at each firmsize to maintain a consistent span ofcontrol.

The number of firms owned and oper-ated in other locations was higher formedium-sized firms compared to smalland micro firms (Table 1). In micro firms,the niche market strategy, with a singleor few product lines, is contained effec-tively in one location. As firms grow theniche strategy is replaced gradually by amass-market strategy, market segmenta-tion, and broader product lines, or evenby diversified products (Mintzberg,Quinn, and Voyer 1995). Thus, inmedium firms production facilities maybe established in other locations inpursuit of more markets.

On average, medium firms were theoldest of the three firm groups, with themajority being more than 10 years old(Table 2). Consistent with their age, ahigher percentage of medium firms were inherited, as older firms are likelyto have been passed on to second-generation owners. The majority ofrespondents were males (79%) between41 and 60 years of age (71%). Many(53%) were employees in other busi-nesses before commencing their currentbusiness or had prior experience as busi-ness owners (44%). There were morefemale owners in micro firms than inboth small and medium firms (Table 2).This is consistent with the literature,which indicates that female owner-man-agers tend to operate smaller firms(Brush 1992; Meredith and Barrett 1994).The percentage of respondents withprior experience in the private sectorwas fewer for medium firms compared tosmall and micro firms (see Table 2)—afinding that may reflect national and tosome extent international changes inemployment preferences over the lastdecade—from public to private sector


KOTEY AND SLADE 25

Table 2 Differences in Firm and Owner-Manager Details:

Chi-Square Statistics

Variables Percentage of Respondents Chi- Chi- Chi-Square Square Square

Micro Small Medium Total for for Micro for SmallFirms Firms Firms (%) Three and and(%) (%) (%) Groups Small Medium

Firm and Personal Details

Aged 10 Years 36 49 58 48 8.09** 1.16** 1.84or Older

Inherited 1.2 2.9 11.8 4.3 13.39*** 0.70 9.06***Businesses

Females 31.3 19.4 15.8 21.4 6.78** 4.79** 0.49Private-Sector 59 55 40.8 53 6.09** 0.40 4.50**

Experience

*p £ 0.10**p £ 0.05

***p £ 0.01

and/or to self-employment (Timmons1999).

Results of the Hypotheses TestsThe results showed that adoption of

formal HRM practices increased withfirm size with a move toward formalpractices occurring early in the growthprocess. This was demonstrated by agreater increase between micro andsmall firms than between small andmedium firms in the percentages of firmsthat implemented various formal HRMpractices. At the micro and small levelsthe adoption of formal HRM practices atthe managerial level lagged behind thatat the operational level. Attention to thedevelopment of managers increased withfirm size. The results also showedincreasing standardization and docu-

mentation of HRM practices as firmsgrow.

Recruitment and SelectionA greater range of formal recruitment

sources, such as newspaper advertise-ments and government recruitment agen-cies, was employed with firm growth.Screening of candidates also intensifiedas the use of various selection techniquesincreased with firm size. Although theuse of formal employment proceduresfor managers lagged behind that foroperational staff in micro and smallfirms, the differences diminished formedium firms. H1, H2, and H3 thus wereconfirmed.

At the operational level, word ofmouth was the main recruitment sourcefor micro and small firms, confirming the

findings of Marlow and Patton (1993).The greater use of government employ-ment agencies, newspaper advertise-ments, and school recruitment by smalland medium-sized firms compared tomicro firms demonstrates increasedformal recruitment sources as firms grow(Table 3). This is consistent with the needto widen the search for suitable employ-ees as the pool of potential employeesfrom informal sources such as family andfriends becomes exhausted (Roberts,Sawbridge, and Bamber 1992). The find-ings also indicate that the skills requiredto support growth are not readily avail-able from these informal sources. Thetrend began early in the growth processbetween micro and small firms butslowed down considerably thereafter (asportrayed by the absence of significantchanges between small and mediumfirms). There was some evidence of inter-nal transfers in small and medium firms,made possible by growth.

The need for suitably qualified mana-gerial staff to fill gaps in the owner-manager’s skills and to takeresponsibility for operational activities asthe firm grows was indicated by thesharp rise in the use of formal recruit-ment sources such as newspaper adver-tisements (Table 3). However, recruitingmanagers by word of mouth was stillcommon in small and medium firms.Atkinson and Meager (1994) suggestedthat this reflects the desire of owners towork with managers who are known tothem. Government agencies and schoolsrarely were used at the managerial level,as these sources are considered moreappropriate for recruiting operationalstaff than managers (Collins andMcLaughlin 1998). Students often lackthe experience required at the manage-rial level, and managers rarely enlist withgovernment employment agencies forwork. In contrast, professional firmswere used more often to recruit man-agers than operatives in small andmedium-sized firms. The predominant

use of newspaper advertisements com-pared to word of mouth to recruit man-agers in medium firms reflects thegreater specialization in tasks. It alsoshows that the number and skills of man-agers required in medium firms are notavailable from the informal sources pre-ferred by the owner-manager. Only asmall percentage of micro firms reportedusing the various recruitment sources atthe managerial level. With less than fiveemployees, recruitment, particularly atthe managerial level, is not a frequentoccurrence in micro firms. The gap in theuse of formal recruitment sources at themanagerial and operational levels dimin-ished in medium firms as more managerswere employed.

The interview was the predominantselection method at the operational levelfor all three groups of firms. This findingis consistent with those of Golhar andDeshpande (1997) and Marlow andPatton (1993). In addition, more smalland medium-sized firms than micro firmsreviewed applications and qualificationsand investigated candidates’ back-grounds from previous employers. Theincreased use of a variety of selectiontechniques as more employees joined thefirm from outside the network of friendsand family is in consonance with theincreased risk in selection and greatercost of recruitment. Although a greatervariety of selection techniques is advisedin HRM texts, greater variety entailshigher costs. For micro firms, the highercosts can be avoided, and employee qual-ities can be assessed better throughinformal interviews (Marlow and Patton1993).

At the managerial level, selection techniques such as interviews, review ofapplications, assessment of candidates’qualifications, and the use of referencesincreased with firm size (Table 4). More-over, investigations from previousemployers were more prevalent in smalland medium-sized firms than in microfirms (Table 4). These selection methods


KOTEY AND SLADE 27

Table 3 Chi-Square Statistics and Wilcoxon Signed Ranked Tests for

Recruitment Variables Measured at Nominal Level


Micro Small Medium Total for Micro SmallFirms Firms Firms (%) Three and and(%) (%) (%) Groups Small Medium

Word of 58.3 57.3 48.7 55.8 1.98 0.024 1.694Mouth (O)a

Word of 9.5 25.6 23.7 21.6 9.43*** 9.345*** 0.108Mouth (M)b

Wilcoxon Zc -6.25*** -7.27*** -3.8***Newspapers (O) 27.4 50.7 55.3 46.4 16.2*** 13.27*** 0.464Newspapers (M) 7.1 27.5 50 27.5 36.76*** 14.64*** 12.72***Wilcoxon Z -3.9*** -5.82*** -0.76Government 25 40 50 38.5 10.86*** 5.749** 2.374

Agencies (O)Government 0 4.3 9.2 4.3 8.2** 3.696** 2.596*

Agencies (M)Wilcoxon Z -4.58*** -8.55*** -5.39***Private 3.6 8.1 13.2 8.1 4.934* 1.913 1.706

Agencies (O)Private 1.2 8.1 15.8 8.1 11.44** 4.944** 3.678**

Agencies (M)Wilcoxon Z 1 0 0.54Professional 1.2 2.8 1.5 2.2 1.098 0.709 0.548

Firms (O)Professional 0 7.1 9.2 5.9 7.29** 6.291** 0.349

Firms (M)Wilcoxon Z 1 3*** 2.12**Schools (O) 1.2 6.2 10.5 5.9 6.28** 3.284* 1.570Schools (M) 0 2.4 5.3 2.4 4.676* 2.025 1.540Wilcoxon Z 1 -2.14** -1.63*Internal 1.2 6.2 9.2 5.7 5.036* 5.284* 0.801

Transfers (O)Internal 1.2 8.1 6.6 6.2 4.895* 4.944** 0.172

Transfers (M)Wilcoxon Z 0 0.894 -0.71

aO: operational level.bM: managerial level.cWilcoxon Z shows the differences between operational and managerial levels in appli-cation of the various practices.

*p £ 0.10**p £ 0.05

***p £ 0.01



Selection Variables Measured at Nominal Level


Micro Small Medium Total for Micro Small Firms Firms Firms (%) Three and and(%) (%) (%) Groups Small Medium

Interviews (O)a 76.5 85.3 82.9 82.9 3.17 3.168* 0.251Interviews (M)b 22 49.3 65.8 46.6 31.88*** 18.161*** 6.118**Wilcoxon Zc -6.49*** -8.61*** -3.15***Qualifications (O) 58.5 71.6 64.5 67.2 4.872* 4.599** 1.330Qualifications (M) 14.6 45.5 61.8 42.0 38.55*** 24.169*** 5.917**Wilcoxon Z -6*** -6.13*** -0.47Review 20.7 42.2 48.7 38.8 15.42*** 11.765*** 0.960

Application (O)Review 9.8 28.9 52.6 29.5 34.93*** 12.033*** 13.786***

Application (M)Wilcoxon Z -2.7*** -4.13*** -0.78Previous 34.1 49.8 42.1 44.7 6.08** 5.810** 1.313

Employment (O)Previous 12.2 30.8 36.8 27.9 13.96*** 10.739*** 0.930

Employment (M)Wilcoxon Z -3.84*** -5.66*** -1.41References (O) 15.9 26.1 27.6 24.1 4.010 3.456* 0.070References (M) 6.1 16.6 27.6 16.5 13.26*** 5.512** 4.339**Wilcoxon Z -2.83*** -3.54*** 0Practical Test (O) 24.4 22.7 15.8 21.7 2.050 0.089 1.637Practical Test (M) 1.2 4.7 5.3 4.1 2.228 2.025 0.033Wilcoxon Z -4.36*** -5.86*** -2.53***Written Test (O) 2.4 5.2 3.9 4.3 1.131 1.072 0.193Written Test (M) 2.4 3.3 5.3 3.5 0.987 0.153 0.574Wilcoxon Z 0 -1.07 0.38Medical Exam (O) 1.2 2.4 6.6 3.0 4.554* 0.389 2.944*Medical Exam (M) 0 1.4 6.6 2.2 9.34*** 1.728 5.484**Wilcoxon Z -1 -1 0

aO: operational level.bM: managerial level.cWilcoxon Z shows the differences between operational and managerial levels in applicationof the various practices.

*p £ 0.10**p £ 0.05

***p £ 0.01

were applied less frequently in microfirms, as employment of managerial staffis rare, and potential managers are likelyto be family and/or friends. This reducesthe need for in-depth screening andreflects the limited resources available tomicro firms.

The gap between operational andmanagerial staff in the application ofvarious selection techniques narrowed inmedium-sized firms compared to microand small firms. At the operational level,there were no significant differencesbetween small and medium firms in theapplication of the various selection tech-niques with the exception of medicalexaminations. In contrast, at the mana-gerial level the percentage of firmsapplying the various selection tech-niques continued to increase as firmsgrew. This suggests greater attention tothe quality of management as firm sizeincreases and as more managers areemployed from outside the confines offriends and family.

TrainingThe results support the hypotheses

that on-the-job training is the predomi-nant training method in SMEs (H4) andthat other training methods gain promi-nence with firm growth (H5), particularlyat the managerial level. That greateremphasis is given to development ofmanagerial staff as firms grow (H6) andthat training of operational staff is dele-gated to middle management (H7) alsowere supported by the results.

At the operational level, the majorityof employers in all three categories offirms provided on-the-job training fortheir employees, supporting the findingsof Marlow and Patton (1993) andHornsby and Kuratko (1990). However,the use of this method declined whilstthe delegation of training responsibilityto supervisors increased with firm size(Table 5). Shifting the responsibility for training operatives from owner-managers to middle management is con-

sistent with increased delegation of oper-ations to middle management as firmsgrow. Nevertheless, the percentage ofowner-managers who provided on-the-job training to operatives exceeded thosewho delegated training to middle man-agement at all firm sizes. This suggests a reluctance of owner-managers to delegate and confirms the findings ofMacMahon and Murphy (1999). Thedecline in external training for opera-tives from small to medium firms mayimply that in-house training by middlemanagement is more cost-effective asemployee numbers increase. For microfirms, training operational staff predom-inantly by watching and correcting theirperformance on the job is justified oncost grounds (Baron and Kreps 1999).

As firms grew, the increased empha-sis on external training for managers sig-nifies concern for both their training andtheir development, possibly to enhancetheir ability to contribute to organiza-tional success (Kaman et al. 2001;Rowden 2002). It also indicates a greaterawareness of management succession.Further, the move toward on-the-jobtraining for managerial staff, as firm sizeincreased, is consistent with the shift inthe role of owner-managers from man-aging operations to managing managers(Timmons 1999). It may also reflect thedesire of owner-managers to maintaincontrol and direct the firm toward theirvision. Relatively little attention wasgiven to training managers in microfirms, possibly because managers are fewand are family or friends with whombusiness matters are discussed infor-mally. In addition, the high level ofuncertainty and change in micro firmscould render extensive training of man-agement ineffective. MacMahon andMurphy (1999) noted that extensivetraining could produce highly special-ized staff unable to adapt to changingwork requirements.

Small and medium firms were morelikely than micro firms to cover more

KOTEY AND SLADE 29

issues during orientation (Table 5) and to provide orientation training for newemployees (Table 6). These findingsreflect the greater resources of small andmedium firms and the need to minimizethe risk and costs associated withemploying staff from sources unfamiliarto the owner-manager. Efforts to ensureconsistency in the orientation processincreased with firm size—about half ofthe medium firms had a checklist ofissues covered during orientation com-pared with one-third for small firms and one-quarter for micro firms (Table5). These findings demonstrate greaterstandardization of HRM practices withgrowth, which is necessary for uniformand efficient practices. Kaman et al.(2001) stated that orientation pro-grams help employees to overcome un-certainty, to become familiar with theorganization, and to make positive contributions.

The increase in coverage of orienta-tion issues between micro and smallfirms compared with small and medium-sized firms supports Blau’s (1970) con-tention that the adoption of formalpractices begins at a faster rate early inthe growth process and continues at adeclining rate thereafter.

More medium firms than both microand small firms indicated that some oftheir employees were multiskilled. Incontrast, the percentages of micro andsmall firms with a totally multiskilledworkforce were higher than for mediumfirms (Table 5). This demonstratesgreater specialization of tasks in mediumfirms. The majority of respondents in allthree categories of firms indicated thatoperations would continue even if one ormore employees (including the owner-manager) were unable to attend to theirnormal duties.

Performance AppraisalThe appraisal of performance of oper-

atives by middle managers increasedwith firm size (H7). Although a higher

percentage of micro and small firmsapplied the various appraisal methods atthe operational level than at the mana-gerial level, the differences declined inmedium firms. As firms grew, there weregreater increases in the percentage usingthe various appraisal methods at themanagerial level than at the operationallevel, confirming H8.

The majority of firms appraised per-formance of their employees, particularlyin small and medium firms (Table 7). Formicro firms, the close association withemployees enabled owner-managers toobserve and to correct wrong perform-ance almost immediately, whereas underthe more formal processes of the largerfirms performance appraisal occurred atless frequent intervals (Table 7). Ratingscales were the most popular appraisalmethods at the operational level, andsome employers compared performancebetween employees. As the number ofoperatives increased, appraisal of theirperformance was delegated increasinglyto managers (Table 7). The use of peerand self-appraisals also increased withfirm size. However, at the operationallevel the use of other appraisal methodsrarely changed as firms grew.

Compared with the appraisal of oper-ative performance, fewer firms appraisedthe performance of managers in microand small firms. This may reflect thesmall number of managers in these firmsand their close association with theowner-manager. In micro and smallfirms, appraisal of management per-formance may take place informally. Themost common methods of appraisingmanagerial performance were by ratingscales and, to a lesser extent, their abilityto meet targets (Table 7). The use oftargets has a flow on effect—by holdingmanagers accountable for performancetargets, they in turn will ensure that thesetargets are achieved at the operationallevel.

The fewer opportunities for promo-tion and limited formal training in micro


KOTEY AND SLADE 31


Training Variables Measured at Nominal Level



Training MethodsOn-the-Job 90.2 80.5 69.7 80.4 10.54*** 4.03** 3.71**

Owners (O)a

On-the-Job 14.6 29 46.1 29.3 18.8*** 6.53*** 7.24***Owners (M)b

Wilcoxon Zc -7.87*** -9.94*** -3.40***By Supervisors (O) 8.5 27.1 52.6 28.3 38.13*** 11.93*** 16.18***By Supervisors (M) 1.2 5.7 10.5 5.7 6.35** 2.8* 1.99Wilcoxon Z -2.45*** -6.3*** -5.66***Job Rotation (O) 35.4 44.3 47.4 42.9 2.68 1.93 0.214Job Rotation (M) 3.7 10.5 15.8 10.1 6.52** 3.5* 1.5Wilcoxon Z -5.1*** -7.99*** -4.54***External Courses (O) 26.8 45.2 31.6 38.3 10.30*** 8.32*** 4.29**External Courses (M) 7.3 24.3 40.0 23.7 23.23*** 10.81*** 6.71***Wilcoxon Z -4.0*** -5.59*** 1.50Encourage External 18.3 29.0 14.7 23.7 8.03** 3.54* 6.05**

Seminars (O)Encourage Ext 9.8 33.3 35.5 28.5 18.37*** 16.75*** 0.12

Sem (M)Wilcoxon Z -2.11** 1.17 3.27***Oblige Ext Sem (O) 6.1 15.7 7.9 12 6.68** 4.82** 2.90*Oblige Ext Sem (M) 2.4 9 14.5 8.7 7.27** 3.86** 0.19Wilcoxon Z -1.34 -2.65*** 1.39

Orientation—Contents

Employment 63 78.2 82.9 75.8 10.03*** 7.06*** 0.75Conditions

Duties 69.1 89.1 88.2 84.5 18.79*** 17.0*** 0.05Introduction to 58 86.7 88.2 80.7 34.39*** 28.84*** 0.10

WorkplaceOHS 45.7 53.1 67.1 54.3 7.57** 1.28 4.48**Management 29.6 56.9 52.6 50 17.64*** 17.38*** 0.40

PoliciesBusiness Objectives 39.5 48.8 39.5 44.8 3.26 2.04 1.96Checklist 25.8 34.8 51.4 36.7 10.53*** 1.86 6.15**Multiskilled—Some 55.6 62.9 79.7 64.7 10.59*** 1.31 7.07***All Multiskilled 39.5 34.8 20.3 32.9 7.28** 0.57 5.37**Ability to Run the 81.5 84.4 80.6 83 0.713 0.35 0.56

Firm

aO: operational level.bM: managerial level.cWilcoxon Z shows the differences between operational and managerial levels in applicationof the various practices.

*p £ 0.10**p £ 0.05

***p £ 0.01

32JO

URN

AL O

F SMA

LL BU

SINESS M

AN

AG

EM

EN

T

Table 6 Results of ANOVA and Multiple Comparisons for Variables Measured at Interval Level

Variables Business Means F-value Significance Comparison of MeansGroup

1–2 1–3 2–3(Significance) (Significance) (Significance)

Orientationb Micro (1) 3.52 -0.55 -0.730 -0.180Small (2) 4.07 7.15 0.001 0.004 0.001 0.564Medium (3) 4.25

Job Descriptiona Micro (1) 1.11 -0.43 -0.64 -0.21Small (2) 1.87 14.48 0.000 0.000 0.000 0.119Medium (3) 2.07

Application Micro (1) 2.13 -0.98 -1.25 -0.27Lvettersb Small (2) 3.11 17.40 0.000 0.000 0.000 0.362

Medium (3) 3.39

Application Micro (1) 1.89 -0.87 -2.10 -1.22Formsb Small (2) 2.76 33.39 0.000 0.000 0.000 0.000

Medium (3) 3.99

Appointment Micro (1) 1.57 -0.89 -1.27 -0.38Lettersb Small (2) 2.46 14.35 0.000 0.000 0.000 0.162

Medium (3) 2.84

Records on Micro (1) 2.04 -0.52 -0.66 -0.15Employeesa Small (2) 2.55 17.0 0.000 0.000 0.000 0.348

Medium (3) 2.70

aVariables measured on a three-point Likert scale.bVariables measured on a five-point Likert scale.

KOTEY AND SLADE 33

Table 7 Chi-Square Statistics and Wilcoxon Signed Ranked Tests

for Performance Appraisal Variables Measured at Nominal Level



Performance Appraisal 70 82.4 80 79 5.95** 5.84** 0.21Daily 29.3 19.5 13.2 20.4 6.53** 3.24* 1.54Monthly 11 24.8 32.9 23.4 11.11*** 6.78*** 1.88Ratings on Duties (O)a 48.8 53.3 56.6 53.3 1.02 0.6 0.17Ratings on duties (M)b 8.5 32.9 50 31 32.52*** 18.12*** 7.0***Managers versus -5.58*** -6.0*** -1.29

OperativesRatings on Quality (O) 48.8 53.3 44.7 50.5 1.78 0.49 1.65Ratings on quality (M) 8.5 24.8 30.3 22.3 12.49*** 9.63*** 0.87Managers versus -5.58*** -7.17*** -3.05***

OperativesComparisons (O) 22 32.4 35.3 30.7 4.06 3.09* 0.25Comparisons (M) 3.7 11.4 13.2 10.1 4.96* 4.24** 0.16Managers versus -3.87*** -6.63*** -3.9***

OperativesMeeting Target (O) 20.7 25.7 17.1 22.8 2.61 0.80 2.31Meeting target (M) 7.3 18.1 21.1 16.3 6.60** 5.35** 0.32Managers versus -2.67*** -2.74*** 1

OperativesObserve Behavior (O) 13.4 21.4 17.1 18.8 2.66 2.44 0.65Observe Behavior (M) 3.7 7.6 17.2 8.7 9.7*** 1.52 5.51**Managers versus -2.83*** -5.05*** 0

OperativesSelf-Assessment (O) 4.9 17.1 9.2 12.8 9.05*** 7.5*** 2.75*Self-Assessment (M) 2.4 11.0 11.8 9.2 5.87** 5.46** 0.04Managers versus 1 -2.84*** 1

OperativesPeer Assessment (O) 8.5 19.0 21.1 17.1 5.64* 4.82** 0.14Peer Assessment (M) 1.2 8.1 14.5 7.9 9.58*** 4.82** 2.57Managers versus -2.45** -4.43*** -1.67*

OperativesSupervisors (O) 19.5 46.7 47.4 40.8 19.74*** 18.27*** 0.01Supervisors (M) 6.1 20.5 25.0 18.2 11.16** 8.88*** 0.67Managers versus -3.32*** -6.93*** -3.71***

Operatives

Use of AppraisalTrain Needs 22.2 41.0 44.7 37.6 10.82*** 8.93*** 0.33

AssessmentPromotion 7.4 22.4 35.5 21.8 18.28*** 8.8*** 5.03**Train Poor Performers 65.4 80.0 69.7 74.7 7.79** 6.79*** 3.35*

aO: operational level.bM: managerial level.

*p £ 0.10**p £ 0.05

***p £ 0.01

firms compared with both small andmedium-sized firms may explain whyless use is made of information from per-formance appraisal to assess employeetraining needs and promotional pro-spects. Both micro and medium firmswere less likely than small firms to trainstaff with consistently low performancebefore terminating their employment.This suggests that micro firms alwaysmay not be able to afford the cost ofextensive training for poor performingemployees. For medium firms, whichmay have the relevant legal and admin-istrative structures for dismissal in place,it may be cheaper to dismiss than to trainvery poor performing staff.

Human Resource Policies and Records

The findings indicate that standardi-zation and documentation of HR proce-dures (H9) and maintenance ofemployee records (H10) increase withfirm size. Both begin early in the growthprocess and continue at an increasingrate thereafter as portrayed by theincreasing percentage of firms with HRpolicies and records on various issues asfirms grew in size (Table 8). Concern foroccupational health and safety (OHS) bythe majority of firms reflects that it is anarea prone to regulation and legaldispute. The narrowing gap betweenwritten OHS policies and verbal commu-nication of these policies to employeesas firm size increased may indicateincreasing use of formal communicationmethods (Table 8).

As owner-managers become distancedfrom employees, it is necessary to main-tain detailed records on each employeefor control purposes, as evidenced by thehigher propensity to maintain suchrecords among small and medium firmscompared to micro firms (Table 6). Theserecords also serve as reference docu-ments in the event of litigation. Further-more, once a certain employment size isreached, records may be maintained in

compliance with legal requirements. Inmicro firms, the close bond betweenemployer and employees, the closecontrol exercised by the employer, andthe high level of informality in HRMpractices reduce the need for detailedrecords on employees. However, thispractice may prove risky in the event oflitigation. While formal human resourcepolicies and procedures may workagainst the flexibility required in microfirms, they are important to ensureuniform and fair treatment of employeesas their numbers increase (Baron andKreps 1999).

The results showed significant differ-ences between micro and both small andmedium-sized firms in the use of jobdescriptions and application letters, butthe differences were not significantbetween small and medium firms (Table6). The findings imply that these admin-istrative procedures (job description andreview of application letters), which min-imize errors in the recruitment and selec-tion process, are implemented early inthe growth process as employeesunknown to the owner-manager join thefirm. The findings are consistent withBlau’s (1972) theory that formal practicesare implemented at a fast rate during theinitial growth phase and at a decliningrate thereafter. The increasing use ofapplication forms as firms grew suggeststhat as the frequency of recruitmentincreases it becomes necessary to stan-dardize the hiring process for both accu-racy and efficiency (Table 6). That jobdescriptions were not provided always ineither small or medium firms confirmsthe findings of Holliday (1995) that jobsare not clearly defined always even in thelarger firms. The increasing propensity toissue appointment letters (Table 6) andto cover more issues in these letters asfirm size increased (Table 8) providefurther evidence of growing implemen-tation of administrative controls toreplace direct control by the owner-manager.


KOTEY AND SLADE 35

Table 8 Chi-Square Statistics for Variables Representing HR Policy

and Records Measured at Nominal Level



HRM PoliciesWorking Hours 22.1 48.0 60.0 44.2 22.93*** 15.1*** 2.73*Annual Leave 16.2 42.3 60.6 40.1 29.51*** 15.79*** 6.51***Sick Leave 14.9 33.1 53.8 33.1 23.74*** 8.74*** 8.64***Overtime 11.1 30.9 50.0 30.2 24.37*** 10.58*** 7.46***Employment Termination 12.3 31.1 47.8 30.3 20.89*** 9.6*** 5.9**Long Service Leave 9.6 22.7 47.5 24.5 26.58*** 5.75** 13.47***Disciplinary Procedures 8.3 22.2 45.5 23.9 26.68*** 6.59*** 12.56***Grievance Handling 6.8 20.1 30.8 19.2 12.86*** 6.7*** 3.06*Promotion 9.7 8.9 16.7 10.7 2.87 0.04 2.71*Written OHS Policies 60 71.3 89.3 72.5 17.09*** 3.4* 7.0***Communicating OHS 88.5 97.5 95.5 95.3 7.08** 9.87*** 0.624

Personnel RecordsSick and Annual Leave 42.7 68.6 77.6 64.7 24.34*** 16.66*** 2.22Workers Compensation 31.7 54.3 69.7 52.4 23.54*** 12.05*** 5.48**Job Description 22 48.6 53.9 43.8 21.03*** 17.26*** 0.65Appointment Letter 14.6 40.5 52.6 37.2 26.58*** 17.75*** 3.35*Training Records 17.1 35.2 47.4 33.7 16.72*** 9.24*** 3.47*Performance Records 17.1 29.5 44.7 29.9 14.44*** 4.75** 5.79**Probation 6.1 13.3 26.3 14.4 13.53*** 3.08* 6.73***Termination 63 78.5 89.2 77.2 15.59*** 7.34*** 4.07*Poor Performance 91.8 85.6 85.3 86.9 1.95 1.80 0.004Absenteeism 72 64 66.7 66.4 1.62 1.62 1.6Disobedience 47.6 59.3 77.3 60.4 14.74*** 3.3* 7.77***OHS Noncompliance 34.1 35.9 48 38 4.1 0.08 3.4*

Appointment Letters—Contents

Job Title 18.5 41.7 56.6 39.7 24.59*** 13.78*** 4.98**Duties 18.5 40.3 59.2 39.4 27.35*** 12.31*** 8.08***Remuneration 18.5 40.8 53.9 38.6 21.75*** 12.8*** 3.94**Superannuation 13.6 26.1 38.2 25.8 12.38*** 5.22** 3.95**Leave Entitlements 13.6 24.2 36.8 24.5 11.51*** 3.93** 4.5**Probation 9.9 34.6 44.7 31.3 24.76*** 17.84*** 2.46

ConclusionsAlthough the study was not set up

explicitly to examine interrelationshipsamong the various dimensions of struc-ture, the findings confirm those of Pughet al. (1968) in the Aston study; Inkson,Pugh, and Hickson (1970); and the repli-cation of the Aston study by Hinings andLee (1971) and Child (1972). Consistentwith these studies, the results suggestpositive associations among specializa-tion (denoted by number of managers),standardization, and formalization ofroles and procedures. The findings showthat regulation of the employees’ workand behavior through specification anddocumentation of their roles, the proce-dures they are to follow in performingthese roles and their performance out-comes, tend to increase as more man-agers (specialist staff) join the firm. Theincrease occurs rapidly initially and thenat the reduced rate thereafter (Blau1970). The findings also concur withChild’s (1972) proposition that whendecision-making is confined to top levels[in this case with the owner-manager(s)]the need for systems, procedures, andpaperwork is reduced, and the require-ment for specialized staff to maintain and operate the established system isminimized.

The results are consistent with thechanges associated with startup andgrowth stages of firms (Hanks et al.1993). In support of the life cycle theo-ries the findings indicate a move fromsimple structures with highly centralizedand informal systems to functional struc-tures with specialized functions andgreater standardization and formalizationof activities. Nevertheless, the percentageof firms in the micro and small categoryaged 10 years or older reflect a prefer-ence among owner-managers for lifestylebusinesses (Storey 1994). This impliesthat some of the firms at micro and smalllevel may be at a mature stage, withgrowth limited by owner-managers

and/or the markets in which theyoperate (Hanks et al. 1993).

The observed changes in HRM prac-tices also may reflect the strategic orien-tation of firms at each of the sizesexamined. In micro-firms, the close rela-tionship between employer and employ-ees replaces formal controls and reducesthe need for detailed documentation,leaving the firm malleable to the frequentchanges that characterize business strat-egy at this size. At this size, businessstrategy is likely to be intuitive and oriented toward aggressive search foropportunities and product development(Hanks et al. 1993).

As the firm grows, product lines maybe broadened to support a strategy ofmarket segmentation and to confrontcompetition (Mintzberg, Quinn, andVoyer 1995). Increased productionmeans more employees are needed at theoperational level. More managers alsoare required to fill gaps in the owner-manager’s expertise and to take respon-sibility for daily operation of the firm asthe owner-manager takes on more strate-gic roles. This is consistent with thetransfer of training and appraisal respon-sibilities to middle management. Admin-istrative procedures and controls replacedirect control by the owner-manager.Documentation is increased as part ofthe control process to enable accounta-bility, particularly as the number ofstakeholders increase. Cappelli andCrocker-Hefter (1996) and Arthur (1994)supported the contention that HRM prac-tices differ with the strategic approachadopted by firms.

Baron and Kreps (1999) cautionedthat the implementation of formal HRMprocedures should not be aimed atensuring conformity with what is per-ceived as “best practice” but rather atdeveloping systems that increase the net benefits associated with humanresources. Such systems should integratewell with other areas of the business andshould create synergistic effects to


enhance the total value of the firm. Thus,decisions to implement formal HRMpractices must involve cost benefit analy-ses. Benefits of formal HRM practicesinclude meeting legal requirements,maintaining records in support of deci-sions in the event of litigation, treatingemployees fairly, and increasing effi-ciency. The major costs are reduced flexibility and financial resources andincreased organizational inertia. FormalHRM practices also can detract from per-formance (Welbourne and Cyr 1999;Kaman et al. 2001). Kaman et al. (2001)found a positive correlation betweenbureaucratic HRM practices and absen-teeism. In contrast, informal proceduresalleviate the personal distance necessaryto handle employee grievances objec-tively and can be problematic to growingfirms (MacMahon and Murphy 1999).Becker, Huselid, and Pickus (1997) statedthat to continue to benefit from success-ful HR practices, firms must add contin-uously to their fundamental practices astheir strategies change with growth.

While the analyses show that a sig-nificant percentage of SMEs implementformal HRM practices with growth, HRMremains informal in the majority of firms,particularly in small firms. It could be thatimplementation of formal HR structuresand procedures necessary to supportgrowth differentiates successful fromunsuccessful SMEs. Kotey and Meredith(1997), Heneman and Berkley (1999),and Huselid (1995) have found positiverelationships between specific HRM prac-tices and firm performance. In general,differences in the adoption of formalHRM practices among SMEs confirmKatzell’s (1962) proposition that varia-tions in management practices amongSMEs can be explained by firm size.

SummaryThe study has shown that (1) unlike

the situation in large firms where HRMpractices are formal, HRM in small andmedium-sized firms changes with size

toward more enunciated and prescribedpractices; (2) the changes in HRM insmall and medium-sized firms beginearly in the growth process and proceedat a faster rate than during the lattergrowth phase; and (3) the adoption offormal HRM practices at the manageriallevel lags behind that at the operationallevel at the smaller firm sizes.

ImplicationsManagement training and advice for

SMEs, which emphasize formal proce-dures, may be counterproductive atcertain firm sizes. Such advice mayreduce flexibility of the firm and mayhinder speedy response to changingstrategic visions and environmental vari-ables. HRM practices such as formalrecruitment sources, extensive screeningof candidates, and extensive training ofemployees may not be necessary inmicro firms, where employee numbersare small, where the majority are eitherfamily or friends, and where the owneris in a position to exercise direct controlover activities in the business. Moreover,the owner-manager may not have theresources required to implement exten-sive HRM practices. Owner-managersshould be made aware of the importanceof maintaining a balance in HRM prac-tices that enable proper accountabilityand control, that reduce the risk of liti-gation, and that ensure statutory require-ments are met, while at the same timeproviding adequate flexibility for re-sponse to changing strategies. The ap-propriate balance will differ with sizeand strategy of the firm.

Limitations and Future ResearchThe study did not examine industry

effects on the changes in HRM practices.This could be addressed in futureresearch. A longitudinal examination of HRM practices of firms as theyprogress through various growth stagesshould complement the findings in thisresearch. Finally, the self-report, single-

KOTEY AND SLADE 37

administrative nature of the question-naire may pose limitations in thatresponses were vulnerable to responseconsistency bias. Future research couldaddress this limitation. Care must betaken in generalizing the findings fromthis research as it is based on SMEs inone small region of Australia.

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