LEADERSHIP, MOTIVATION, AND STRATEGIC HUMAN RESOURCE MANAGEMENT:IMPLICATIONS FOR STRATEGIC HUMAN RESOURCE MANAGEMENT

IMPLICATIONS FOR STRATEGIC HUMAN RESOURCE MANAGEMENT

This section will introduce central implications of the implementation of the new genre of leadership theories in organizations. Our goal is to focus on the implications of leadership research in the framework of the major functions of human resource management (HRM). As with other aspects of organizational behavior, leadership and motivation research has contributed to the development of sophisticated HRM tools and techniques that have been shown to improve organizational effectiveness (e.g., Jackson and Schuler 1995). The major functions of HRM, discussed below, are recruiting, performance appraisal, training, and compensation. For each function, we provide a background based on a strategic approach to HRM. We then describe the utility of the above research findings, regarding leadership and motivation, to strategic HRM and provide examples.

A Strategic Approach to Human Resource Management

As traditional sources of competitive advantage, such as technology and economies of scale, provide less competitive leverage now than in the past, core capabilities and competence, derived from how people are managed have become more important. A strategic perspective of human resource man- agement is critical for creating and sustaining human resource-based competitive advantage (Siva- subramaniam and Ratnam 1998). A strategic approach to HRM implies a focus on ‘‘planned HRM deployments and activities intended to enable the form to achieve its goals’’ (Wright and McMahan 1992, p. 298). Strategic HRM involves designing and implementing a set of internally consistent policies and practices that ensure that a firm’s human capital (employees’ collective knowledge, skills, and abilities) contributes to the achievement of its business objectives. Internal consistency is achieved by creating vertical and horizontal fit. Vertical fit involves the alignment of HRM practices and strategic management, and horizontal fit refers to the alignment of the different HRM functions (Wright and Snell 1998).

Strategic HRM is concerned with recognizing the impact of the outside environment, competition, and labor markets, emphasizes choice and decision making, and has a long-term focus integrated in the overall corporate strategy. For instance, companies like General Motors that emphasize a re- trenchment or cost reduction strategy will have an HRM strategy of wage reduction and job redesign, while the growth corporate strategy of Intel requires that it will aggressively recruit new employees and rise wages (Anthony et al. 1998). Similarly, cost-reduction policies may require that leaders emphasize equity and contingent reward, while growth strategy should enhance transformational leadership. Cost-reduction and growth strategies, as well as other strategies, have clear implications for how companies should recruit employees, evaluate their performance, and design training and compensation systems.

Considerable evidence has shown the performance implications of HRM. These studies indicate that high-performing systems are characterized by careful selection, focus on a broad range of skills, employ multisource appraisals focused on employee development, employ teams as a fundamental building block of the organization’s work systems, provide facilitative supervision, include human resource considerations in strategic decision making, and link rewards to performance that focuses the employees on the long-term goals of the firm. These findings have been fairly consistent across industries and cultures (Sivasubramaniam and Ratnam 1998).

Recruiting: From Hiring to Socialization

Recruiting, the process by which organizations locate and attract individuals to fill job vacancies, should be matched with company strategy and values as well as with external concerns, such as the state of the labor market. Recruiting includes both pre- and post-hiring goals. Among the pre-hiring goals are attracting large pools of well-qualified applicants. Post-hiring goals include socializing employees to be high performers and creating a climate to motivate them to stay with the organization (Fisher et al. 1996). Another major decision in the recruiting philosophy of a firm is whether to rely on hiring outside candidates or to promote from within the organization.

The above decisions and goals have implications for how organizations can benefit from recent research on leadership and motivation. Organizations that recruit from their internal labor market and accept candidates for long-term employment may seek candidates with leadership skills who can be potential managers. Such organization may use mentoring programs as a way of enhancing employee socialization. Other organizations may benefit from using leadership skills as part of the selection procedures they employ, though the use of leadership characteristics as a criterion for selection is highly controversial (e.g., Lowery 1995).

Implications for Selection

While good leadership qualities could be a criterion for selecting employees at all levels, if used at all, it is more common in managerial selection. Managerial selection is a particularly difficult task because there are many different ways to be a successful manager. Managing requires a wide range of skills, one of which could be leadership. Leadership effectiveness was found to relate to common selection criteria, such as practical intelligence, reasoning, creativity, and achievement motivation (Mumford et al. 1993). However, many HRM professionals are reluctant to use leadership as a criterion for selection, citing reasons, such as lack of definition, complexity of the construct, and difficulty in validating selection tools (Lowery 1995). These challenges pose a threat to the validity of the selection process. An invalid selection system may be illegal, as well as strategically harmful for the organization. Consequently, our discussion of leadership as a selection tool is mainly exploratory.

The most common use of leadership criteria in selection is as part of an assessment center (e.g., Russell 1990). Assessment centers are work samples of the job for which candidates are selected (mostly candidates for managerial positions). They can last from one day to one week and have multiple means of assessment, multiple candidates, and multiple assessors. Assessment centers are

considered relatively valid predictors of both short- and long-term success in managerial positions (e.g., Russell 1987).

Many assessment centers include leadership evaluation in the form of leaderless group discussions, where candidates are evaluated on small-group management activities (Lowery 1995). In the simple form of leaderless group discussion, the initially leaderless group is assigned a problem to discuss to reach a group decision. Assessors judge who emerges as a leader, initiatives displayed by each participant, and other aspects of interpersonal performance (Bass 1990). Assessors are required to identify behaviors, such as gatekeeping, facilitate support, and evaluate the candidate’s ability to accomplish the ‘‘tasks.’’ Although assessment centers are generally more suitable for evaluating can- didates for promotion, they are also used with candidates for entry (Lowery 1995). In Lowery’s review of the applicability of measuring leadership in an assessment center, he argues that we still do not know how to assess leadership as an independent performance dimension in assessment centers.

Recognizing the limitations of assessment centers, Russell (1990) suggested using biodata to select top corporate leaders. According to Kunhert and Lewis (1987), biodata captures early life events, which are hypothesized to impact leadership performance in adulthood. They argued that transfor- mational leaders derive meaning from personal experience in a significantly different way than trans- actional leaders based on early development. Identifying the life experiences that lead to the development of transformational leaders may contribute to selecting such leaders based on their biodata reports. Indeed, Russell (1990) obtained correlations between prior life experiences and con- tribution to fiscal performance of candidates for top managerial positions at a Fortune 50 firm. According to Russell, transformational leadership measures may be a good source of anecdotal be- havioral examples that correlate with biodata and can serve as tools for executive selection.

More recent attempts to utilize findings from the new genre of leadership theory in selection use both biodata and assessment center procedures. Avolio and colleagues from South Africa have de- veloped a preliminary tool to assess the leadership potential of candidates to the South African police force. This tool is based on the multifactor leadership questionnaire (MLQ) developed by Bass and Avolio (1996) to measure the full range leadership styles. The assessment center also includes a biodata survey that has been used in previous research (Avolio 1994). Similarly, researchers from the Center for Creative Leadership examined the process of executive selection and identified that success in the top three jobs in large organizations was predicted mostly by ‘‘relationships with subordinates’’ and ‘‘expressed affection’’ (Kouzes 1999).

The above are examples of early application of the new genre of leadership theory in selection. However, since selection procedures require serious legal considerations, the application of findings from recent research to selection is relatively slow. However, recent leadership approaches may provide insights for other recruiting-related functions, such as mentoring.

Implications for Mentoring and Socialization

A strategic HRM approach requires that the staffing process not end once applicants are hired or promoted. To retain and maximize human resources, organizations must emphasize socializing newly hired / promoted employees. A thorough and systematic approach to socializing new employees is necessary if they are to become effective workers. Good socialization is essential to ensure employee understanding of the company’s mission and vision. It includes a realistic job preview (RJP) that allows the creation of appropriate expectations for the job (Breaugh 1983). RJP includes presenting realistic information about job demands, the organization’s expectations, and the work environment. At a later stage, when employees begin to feel part of the organization, a mentoring program, in which an established worker serves as an adviser to the new employee, may help in the socialization process. Mentoring programs are especially necessary in environments of high turnover, such as high technology (Messmer 1998).

Mentoring programs have both short- and long-term benefits. In addition to developing the skills, knowledge, and leadership abilities of new and seasoned professionals, these programs strengthen employee commitment (Messmer 1998). Mentoring programs have been successful in developing new talent, as well as recruiting junior level staff and bringing them up to speed on policies and procedures. Mentors provide more than company orientation; they become trusted advisors on issues ranging from career development to corporate culture. At a time when many executives are managing information instead of people, mentoring may offer a welcome opportunity to maintain the kinds of critical interpersonal skills that can further a manager’s career. Although the mentors in most men- toring programs are not the supervisors of the mentees, the characteristics of good mentors are very similar to the characteristics of good leaders, especially transformational leaders (Bass 1985).

Bass (1985) argues that effective transformational leaders emphasize individualized consideration that involves the leader’s service as a counselor for their proteges. Such leaders have more knowledge and experience and the required status to develop their proteges. Johnson (1980) found that two thirds of 122 recently promoted employees had mentors. Bass (1985) claims that since mentors are seen as authorities in the system, their reassurance helps mentees be more ready, willing and able to cooperate in joint efforts. Moreover, mentoring is an efficient method for leadership development because followers are more likely to model their leadership style on that of their mentor, as compared with a manager who is not seen as a mentor (Weiss 1978). To be effective, mentors need to be successful, competent, and considerate (Bass 1985). Companies like Bank of America and Pricewaterhouse- Coopers’ employ mentoring mostly to increase retention. In competitive labor markets, such as the high-technology industry, increasing retention is a major HR goal. In PricewaterhouseCoopers’, men- toring has led to an increase in female retention (Messmer 1998). Clearly, transformational leadership, and individualized consideration in particular, can provide a strategic advantage to organizations that employ mentoring programs.

The development of mentoring programs should include a review of needs for mentoring, a buy- in from senior management, and constant updating of all managers involved with the mentee. Such programs should also include a selection of mentors based on the above principles, a careful match of participants, and company events to demonstrate the importance of the mentoring program for the organization (Messmer 1998). Top managers, such as the long-time CEO of the Baton Rouge Refinery of Exxon, are seen as more effective if they develop their followers. In the case of Exxon, these followers were later promoted more than their mentor.

We chose to demonstrate the contribution of effective leadership to recruiting using the examples of selection and mentoring. However, leadership and motivation are important parts of other recruiting processes, such as in interviewer skills and assessment of candidates’ motivation. We chose those aspects that we feel benefit especially from the new genre of leadership theories. We continue to use this approach with the HRM function of performance management.

From Performance Appraisal to Performance Management

Performance appraisal is the process by which an employee’s contribution to the organization during a specific period of time is assessed. Performance feedback provides the employees with information on how well they performed. If used inappropriately, performance appraisal can be disastrous and lead to a decrease in employee motivation and performance. Performance appraisal has a significant strategic role in HRM. It provides strategic advantage by allowing the organization to monitor both its individual employees and the extent to which organizational goals are met. From a strategic HRM perspective, performance appraisal involves more than assessment or measurement. Rather, it is a method for performance management, including defining performance, measuring it, and providing feedback and coaching to employees (Fisher et al. 1996). In sum, performance management has three major strategic functions. First, it signals to employees which behaviors are consistent with organi- zational strategy. Second, if used appropriately, it is a useful method for organizational assessment. Finally, it is a feedback mechanism that promotes employee development. The movement from a focus on appraisal to performance management allows for better application of the new genre of leadership and motivation theory.

While the traditional performance-appraisal systems emphasized uniform, control-oriented, narrow-focus appraisal procedures that involved supervisory input alone, strategic performance man- agement emphasizes customization, multipurpose, and multiple raters, focusing on development rather than past performance. Similarly, whereas traditional approaches to leadership and motivation (e.g., House 1971) emphasized control and exchange based on extrinsic motivators, more recent approaches emphasize development and influence through intrinsic motivators (e.g., Bass 1985; Shamir et al. 1993). Indeed, even during the 1980s and the beginning of the 1990s, employees and managers viewed performance appraisal negatively. Longnecker and Gioia (1996, in Vicere and Fulmer 1996) found that out of 400 managers, only one quarter were satisfied with appraisal systems and the higher a manager rose in the organization, the less likely he or she was to receive quality feedback. Nev- ertheless, they indicated that when used as a strategic tool for executives, systematic feedback was crucial for them. Many of them were also willing to be evaluated personally. According to Vicere and Fulmer (1996), performance-management processes are highly linked with leadership develop- ment. We chose to focus on the contributions of leadership research to two aspects of performance management: feedback from multiple raters (360°) and alignment of strategic goals.

Implications for Feedback

As we mentioned above, strategic performance-management systems involve more than the traditional supervisory evaluation. Current appraisal systems often include peer ratings, follower ratings, and self-ratings. Each source seems to contribute differently and their combination (a 360° approach) is used mainly for developmental reasons (Waldman et al. 1998). About 12% of American organizations are using full 360° programs for reasons such as management development, employee involvement, communication, and culture change (Waldman et al. 1998). Advocates of 360° systems believe that they contribute to leadership development by allowing managers to compare their self-perceptions with those of their employees (Yammarino and Atwater 1997).

The gaps between self and other ratings were found to predict the perceived performance of the leader. Agreement between self and other reports on high ratings predicted high performance (Yam- marino and Atwater 1997). Gaps between self and other ratings may also relate to the leadership style of the targeted manager. Transformational executives who had ratings congruent with those of their followers were seen as highly considerate, emphasized meetings with their employees, and associated individual employee goals with organizational goals.

Nontransformational leaders, who had little congruence with their followers’ ratings, were seen as detached and as having little or no impact (Berson and Avolio 1999). These findings may contribute to a better understanding of the gaps between raters and provide insight into the type of training and development that can be given to managers following performance appraisal. This is especially im- portant given recent criticism of the use of 360° in performance management. Waldman et al. (1998) argued that 360° feedback, in addition to being a high cost, has become a fad rather than a system- atically and appropriately used tool. Rather, 360° systems should be tailored to organizational needs.

Implications for Alignment and Signaling of Strategic Goals

A major strategic advantage of performance management is that it is a method by which managers signal to employees the mission of the unit or the organization. Managers can use performance management to align their employees’ behaviors with organizational goals or strategy. Employees want to be rewarded and will engage in behaviors that their supervisors emphasize. We expect transactional leaders to use performance appraisal as a mechanism of contingent reward (Bass 1985; Bass and Avolio 1994). Such leaders will mostly benefit from performance appraisal in the short term. In order to achieve a long-term alignment with organizational goals, supervisors need to have followers who identify with them. Transformational or charismatic leaders may be able to use per- formance management to align followers with organizational goals and inspire and motivate them to achieve these goals. These leaders will be better communicators of organizational goals. Indeed, effective appraisal depends on the supervisor’s ability to communicate organizational goals.

In a study of a large telecommunication company, Berson and Avolio (2000) found that employees of transformational leaders viewed their managers as more open and informal and as better conveyers and receivers of information than employees of nontransformational leaders. Moreover, employees of effective communicators were more aware of strategic organizational goals than employees who reported to less effective communicators. These findings hint that supervisors who are transforma- tional leaders will be able to utilize performance-management systems to communicate strategic goals more effectively than transactional supervisors for whom performance management may serve as a contract with employees. In addition to better communication of organizational goals, charismatic leaders may also use performance-management systems to sense the environment. Such leaders can use performance management to assess the capabilities of the organization and determine quality goals (Conger and Kanungo 1998).

In summary, evidence from studies in the new genre of leadership theories offers insights regard- ing the strong impact of transformational or charismatic leaders on their followers. We believe that performance management is an excellent tool for such leaders to communicate strategic goals and sense followers’ needs for personal development.

From Training to Development

With the rapid developments in technology and the changing nature of jobs, the provision of training and development exercises has become a major strategic objective for the organization. Organizations provide training for many reasons, from orientation to the organization and improving performance on the job to preparation for future promotion. Like other HRM functions, training should be aligned with the strategic goals of the organization. Organizations that rely on a highly committed, stable workforce will have to invest more in individuals than will organizations that employ unskilled temporary employees (Fisher et al. 1996).

When a company changes strategy, as Xerox did when it became ‘‘the Document Company,’’ it begins intensive training to equip employees with the new skills. Xerox spent $7 million on devel- oping a training center. In a world of networking and alliances between organizations, Xerox needs this center not only to train its employees but to train suppliers, customers, and other constituencies. Xerox, like other employers, has a long-term perspective on its workforce and is using training to increase employee retention. More and more professionals seek jobs that will provide them with the opportunity for professional development. Many engineers who work in high-technology industries have multiple job opportunities and are constantly in the job market (Messmer 1998). Consequently, organizations that wish to decrease turnover move from emphasizing short-term training for specific purposes to long-term development.

We believe that the shift to development calls for more leadership of the new genre type. While the short-term emphasis on training, where employees are trained to learn a new skill that they need for their current task or job, required mainly task-oriented transactional leadership, the move to long-

term development entails transformational leadership. The need for more transformational or char- ismatic leaders in organizations is a consequence of several trends that reflect the shift from training to development. First, in addition to sending employee to off-the-job training workshops, more com- panies emphasize individual coaching. Coaching, like other types of on-the-job training, ensures maximized transfer between what was learned in the training and the actual job (Ford 1997). On- the-job training also allows for maximum trainee motivation because trainees see this type of training as highly relevant.

Second, as managerial jobs become more complex, there is an increased need for managerial training. Most typologies of managerial tasks emphasize that managers need to have leadership skills. Specifically, skills such as providing feedback, communication, motivation, aligning individual goals with organizational goals, and having good relationships with colleagues and followers should be the focus of development (Kraut et al. 1989).

Finally, as discussed above regarding socializing employees, coaching and mentoring programs have become more popular, sometimes as spontaneous mentor–prote´ge´ relationship and sometimes as an organized mentoring program (Messmer 1998).

These shifts in training, together with the emphasis on long-term development, highlight the importance of developing transformational leadership in the organization. Transformational leaders develop significant relationships with their followers and thus have a chance to be seen as coaches and to provide practical on-the-job training. These leaders are also intellectually stimulating and can constantly challenge employees and develop them. Personal development involves individualized consideration, another major style of transformational leaders. More specifically, individualized con- sideration consists of mentoring (Bass 1985).

Furthermore, both intellectual stimulation and individualized consideration can be cultivated and nurtured not only at the individual level but also at the team and organizational levels (Avolio and Bass 1995). Organizations can create cultures that encourage coaching and development while pro- viding consideration and recognition of individual needs. Paul Galvin, a CEO of Motorola, created a culture, based on his leadership style, where risk-taking is advocated and seen as the most secure approach (Avolio 1999). Employees are encouraged to be creative and develop new products.

Intellectually stimulating leaders also empower their followers (Bass 1985). Empowerment is an effective method of training because employees learn more tasks and are responsible for problem solving. It is especially important in innovative environments where employees have to learn to take risks. Organizations that employ empowering techniques try to applaud both successful and unsuc- cessful risk-taking behavior. For example, Lockheed Martin takes a team approach to empowerment. Employees who have knowledge regarding an aspect of a project are encouraged to speak up (Wolff 1997, in Anthony et al. 1998). In this way, employees get to experience managerial roles.

Several studies using the transformational leadership paradigm have demonstrated the relation- ships between transformational leadership and empowerment. Masi (1994, in Avolio 1999) reported positive correlations between transformational leadership and empowering organizational culture norms. Moreover, transformational leadership at the top may filter to lower levels of the organization. Bass and Avolio (1994) suggested the ‘‘falling dominoes effect,’’ where leaders who report to trans- formational leaders tend to be transformational as well. Bryce (1988, in Avolio 1999) found support for this effect in a study of Japanese senior company leaders. Finally, Spreitzer and Jansaz (1998, in Avolio 1999) found that empowered managers are seen as more intellectually stimulating and char- ismatic than nonempowered managers. These findings demonstrate that by being transformational, executives can create a culture that facilitates professional development for their employees. Even when their managers are empowered by other managers, followers seem to attribute charisma and intellectual stimulation to the empowered leader.

In addition to the contribution of transformational leaders to employee and managerial develop- ment, organizations can use transformational leadership as a model for training leadership. There seems to be agreement that leadership is to some extent innate but to some extent trainable (e.g., Avolio 1999). From the models of the new genre of leadership, training using the full range leadership model has been the most extensive. Crookall (1989) compared the effectiveness of training Canadian prison shop supervisors in transformational leadership and in situational leadership using a control group that did not receive any training. Crookall concluded that the transformational leadership workshop had a significant positive impact on two of the four performance measures subjectively evaluated by superiors, and the situational leadership training had significant positive influence on one of the four subjective performance measures. There was no change in the perceived performance of the untrained group. In addition, a significant positive impact was found in both training groups on turnover, work habits, and managers’ evaluations regarding the personal growth of prisoners. Significant improvement regarding respect for superiors, professional skills, and good citizenship as evaluated by the manager, were found only for the transformational leadership workshop.

A more recent study (Barling et al. 1996) demonstrated that bank branch managers who received transformational leadership training had a more positive impact on follower commitment and unit financial performance than did those who did not receive training. Finally, Dvir et al. (in press)

conducted a comprehensive randomized field experiment comparing the impact of military leaders who received training in transformational leadership vs. leaders who participated in an eclectic lead- ership training program. Indirect followers of leaders who participated in the transformational training demonstrated superior performance on a battery of objective measures. Direct followers of leaders who got the transformational training showed higher levels of personal development over time. The above findings, together with the extensive training conducted with the transformational leadership model in a wide range of organizations (Avolio 1999), suggest that organizations can benefit from the advantages of the new-genre leaders by training managers at all levels to become transformational (Bass 1990).

Compensation: From Transactional to Intrinsic Reward Systems

We conclude our discussion of HRM functions with compensation systems. Our goal is to demon- strate that although compensation systems seem to be a classic example of contractual or transactional conduct between employees and the organization, transformational leaders can utilize this strong rewarding agent to motivate employees to perform beyond expectations (Bass 1985).

Organizations expect employees to provide their services and in return to be compensated. Com- pensation exists to help employees fulfill their own needs. Consequently, classic compensation sys- tems are based on pure exchange or contractual relationships between employees and the organization. In effect, innovative organizations use compensation systems as a strategic tool. Compensation, like performance-management systems, can help signal to employees the major objectives of the orga- nization (e.g., customer focus), to attract and retain employees, encourage skill development, motivate employees to perform effectively, and help shape organizational culture (Fisher et al. 1996). Com- pensation is considered the most important HRM function and is seen as crucial by all employees. It includes different aspects of pay and benefits. Although compensation systems are supposed to motivate employees, there is high variability in their effectiveness.

HRM professionals and researchers have been using motivation theory to examine compensation systems. Most of these theories view compensation as a transaction and its components as extrinsic motivators. However, these theories tend to explain why employees do not just work for money (Fisher et al. 1996). For example, according to equity theory, individuals determine whether they are being fairly treated by comparing their input / outcome ratio to the input / outcome ratio of someone else. However, individuals may be motivated to work by factors beyond the direct input / output ratio of their peers. For example, the success of the software company SAS, which is growing at an annual rate of more than 25%, cannot be explained using equity models. Although most software companies pay their employees with bonuses and stock options, SAS offers an intellectually rewarding environ- ment and a family corporate culture. SAS has a 4% turnover rate and is the largest privately owned software company (Pfeffer 1998). According to equity theory, there is little equity between SAS employees and other software employees in similar positions. However, based on turnover rates, it seems that SAS employees are quite motivated. Theories that make motivation contingent on com- pensation are, according to Pfeffer (1998), a myth that has little or no supporting evidence.

The intellectually engaging work and friendly environment as well as the ability to work using state-of-the-art technology (Pfeffer 1998) that SAS provides its employees can explain their extra effort according to the new genre of leadership theories. SAS employees and other employees do indeed expect monetary rewards, but their extra effort relates to intrinsic factors such as leadership and organizational culture. As Bass and Avolio (1994) suggest, this is an example of how transfor- mational leadership augments transactional or contingent reward behaviors.

Transformational leaders have employees who trust them and are committed to work for more then short-term goals. Transactional leaders, who rely on contingent reward and management by exception, teach employees that they should work only when rewarded or when they are closely monitored. Such leaders signal to their followers that they do not trust them. Consequently, these employees will be less motivated than employees who feel that their supervisors do trust them. Indeed, companies like Southwest Airlines recognize these issues and highlight managing through trust and respect rather than exceptional compensation packages (Bass 1985; Pfeffer 1998).

Moreover, transformational leaders provide a personal example to employees. Executives who get paid over 80 times more than their employees do not signal to employees that pay is motivating. For example, Whole Food Markets pays nobody in the company more than 8 times the average company salary. Similarly, when the CEO of Southwest Airlines asked pilots to freeze their salaries for another year, he froze his own salary for four years. On the other hand, paying executives bonuses when employees are being laid off, as was done by GM in the 1980s, sends the wrong message to em- ployees (Pfeffer 1998). Motivating employees using compensation has to be aligned with other or- ganizational practices, including exemplification of top managers. By providing an example, executives send a message that they share a common fate and that the organization emphasizes a culture of cooperation and teamwork rather than competition.

Compensation systems often highlight individual incentives (Fisher et al. 1996). Among these incentives are commissions, bonuses, and merit pay. Although these methods lead to employee sat- isfaction, they have little relationship with organizational outcomes that can be measured only at the unit or the organizational levels. Indeed, when organizations want to encourage teamwork, rewarding individuals may be extremely harmful. They end up with a compensation system that undermines teamwork and focuses on short-term goals. Such compensation systems send a mixed message to employees regarding organizational goals. As the director of corporate industrial relations at Xerox said, ‘‘if managers seeking to improve performance or solve organizational problems use compen- sation as the only lever, they will get two results: nothing will happen, and they will spend a lot of money. That’s because people want more out of their jobs than just money’’ (Pfeffer 1998). Trans- formational leaders appeal to collective needs of employees and help align their individual goals with organizational goals (Shamir et al. 1993). Organizations need to emphasize collective rewards, such as profit-sharing and gain-sharing plans, where employees share organizational gains. These methods may motivate teamwork to a certain extent, but effective teamwork will still depend on leaders and the culture or environment that they create. Rather, transformational leaders may be able to use compensation and its components to signal what is important and thus shape company culture.

In summary, the traditional notion that compensation systems are effective motivators is based on a transactional contractual approach to employee–management relations. More recent approaches to compensation emphasize rewarding at least at the team if not the organizational level and posit that monetary rewards should accompany intrinsic rewards, such as trust and recognition. These recent approaches also emphasize decentralizing pay decisions (Gomez-Mejia et al. 1998). We argue here that these new compensation procedures can be better applied by transformational or charismatic leaders. Applying the full range leadership model, we argue that such leaders may also exhibit contingent reward and management by exception to support the basic compensation contract. How- ever, aligned with transformational leadership, the above compensation procedures can lead to max- imum motivation.

Involvement-Transformational vs. Inducement-Transactional HRM Systems: An Integrative Framework

One common characteristic of most extant research is the use of the ‘‘parts view’’ of HRM. Typically, researchers identify dimensions of HRM to identify the dimensions that were significantly related to performance. New approaches to HRM argue that to be considered strategic, the set of practices should be part of a system, interrelated, interdependent, and mutually reinforcing. HRM systems are best viewed as configurations, systems of mutually reinforcing and interdependent set of practices that provide the overarching framework for strategic actions. The configurational approach to HRM has gained support in recent empirical studies (review in Sivasubramaniam and Ratnam 1998). Dyer and Holder (1988) have proposed three clusters of human resource strategies, labeled inducement, investment, and involvement.

Inducement human resource strategy is based on the concept of motivation through rewards and punishment. Companies following this philosophy tend to emphasize pay and benefits, perquisites, or assignment to nontraditional work environments as inducement to perform and remain with the firm. In addition, such firms demand high levels of reliable role behaviors, define jobs narrowly, hire on the basis of meeting minimum qualifications, and provide directive supervision. The inducement strategy is most closely linked to transactional leadership (Kroeck 1994).

Investment human resource strategy is built around extensive training and development. Compa- nies adhering to this strategy place a premium on the long-range education of employees and expect employees to exercise a fair amount of initiative and creativity in carrying out their tasks. Dominant corporate values are personal growth, respect, equity, justice, and security, not autonomy and em- powerment. Due to the developmental aspects of this strategy, some (e.g., Kroeck 1994) link it to the individualized consideration style in the full range leadership model. However, because this strategy often takes on a paternalistic approach to management, and because of the lack of emphasis

on autonomy and empowerment, core elements in the relationships between transformational leaders and their followers, we will refer to this strategy as paternalistic.

Involvement human resource strategy is built around creating a very high level of employee commitment. Employees are motivated by the stimulus of autonomy, responsibility, and variety and of being able to see their contribution to the final product or service. The employees at these com- panies are expected to exercise considerable initiative and creativity as well as display a high degree of flexibility to adapt to rapid change. Team-based work systems are the building blocks of the organization, and supervision is facilitative and minimal. The involvement strategy calls for all four styles of transformational leadership (Kroeck 1994).

It was found that in general, firms following an involvement strategy outperformed firms pursuing inducement strategy. For example, Sivasubramaniam, et al. (1997, in Avolio 1999) conducted a study among 50 Indian firms and found higher correlations between involvement-transformational human

resource strategy and the firm’s return on investment and return on assets compared to the induce- ment-transactional and investment-paternalistic strategies (see Figure 6). Sivasubramaniam and Rat- nam (1998) found that firms pursuing an involvement-transformational human resource strategy outperformed the other firms in actual accounting returns. Specifically, adopting an involvement human resource strategy translated into nearly a 4.5% edge in return on investment. For a typical firm in this study, this would mean an additional profit of nearly $400,000 per year, a sustainable advantage accrued due to superior human resource practices. It should be noted that these results were obtained after controlling for past year’s profitability and hence cannot be dismissed as possibly due to profitable firms having the resources to invest in innovative human resource practices. These firms also reported lower levels of employee turnover as compared to their closest competitors, as well as superior human resource performance. In contrast, inducement-transactional type firms out- performed other firms in labor productivity because their primary focus is on efficiency.

2. CONCLUSION

An overwhelming body of evidence supports the notion that transformational leadership exists at many hierarchical levels, in a variety of organizational settings, and across many cultures. This new genre of leadership theories holds different assumptions on human motivation than traditional lead- ership theories. The emphasis has shifted from calculative, individualistic, short-term, extrinsic mo- tivation to work toward more expressive, collectivistic, long-term, intrinsic motivators. Numerous studies have supported the greater effectiveness of transformational leadership compared to transac- tional and nontransactional leadership in enhancing employees’ development and performance.

The advantages of transformational leadership have contributed to practical applications in the major HRM functions. Beginning with recruiting, transformational leaders emphasize long-term socialization rather than focusing on hiring alone. Moreover, the commitment of such leaders to employee growth transcends performance appraisal to become developmentally oriented performance- management systems. Furthermore, such systems can be used as a basis for programs that view employee skills and potential contribution rather than training for specific tasks. Finally, while trans- actional leaders rely mostly on monetary rewards that build contractual relations with employees, transformational leaders augment these rewards with intrinsic motivators that lead to building a highly committed workforce.

As the market conditions get tougher and competitors attempt to duplicate every single source of advantage, what may be sustainable and inimitable by competition is the human resource-based advantage (Sivasubramaniam and Ratnam 1998). Therefore, an integrated, interdependent, and mu- tually reinforcing HRM system that represents the new leadership and motivational paradigms may contribute to organizational effectiveness.