Best Fit vs. Best Practice: Strategic HRM Reward Systems

Introduction to Strategic HRM

Strategic reward systems were developed as a part of the human resources management (HRM) department. The purpose of strategic human resources management is to complement organizational strategy and to help management achieve its goals. Thinking of human resources strategically helps the company become more productive and eliminate waste. Long ago, human resources departments began to realize the value of their employees — recognizing that without productive employees they would be unable to compete in the open market. The key to a sustainable competitive strategy is managing employees effectively. Companies began to realize that employees were more than bodies filling roles; they were a more valuable asset than any piece of equipment or any other resource the company owned. This realization led to the HRM department being incorporated into the overall company strategy.

Human resources strategies have developed into either the "best practice" model or the "best fit" model. Boxall and Purcell (2000) argued that in order for HRM to be effective, its policies and practices must fit with the work system. This paper explores that claim and examines its value to managers — specifically whether the statement offers genuine insight or whether it simply states the obvious.

In order to examine this issue, it is important to understand the differences between best practices and best fit. The best fit method proposes that the reward system should be aligned with the organization's business strategy to achieve maximum competitive advantage. Best practice holds that there is a certain set of HR policies that will lead to highly motivated and committed employees. The best practice model surmises that finding the proper reward system will produce highly committed employees and thereby increase the company's competitive advantage. However, the differences between these two models extend well beyond these simple definitions.

The idea that pay should be linked to corporate strategy is not new. It first began to appear in the literature in the mid-1990s (Morris & Maloney). The best fit approach advocates that every department in the business must be aligned with the corporate strategy. If one department operates out of alignment, it harms the effectiveness and competitiveness of the entire organization. The human resources department is no exception, and it was soon recognized that a company's pay approach and reward system must be part of this overall strategy.

The best practices approach is largely associated with the United States, though more recently managers in Britain have adopted it as well (Morris & Maloney). It stands to reason that both HR practice models should be complementary; however, scholars and managers remain divided as to whether best practices or best fit produces the more effective company strategy. Rather than treating them as complementary, theorists tend to support one model or the other. Current thinking within organizations is that their strategy must be either best practices or best fit, and that using both within the same organization is not feasible under the current paradigm.

Understanding Best Practices and Best Fit Policies

The best practices model and its effects on employees and organizational strategy merit close examination. As noted above, best practices suggests that certain "bundles" of human resources policies promote higher employee motivation and commitment overall. These bundles are held to be responsible for organizational performance. Their specific contents vary, but most accounts agree that selective hiring, extensive training, employment security, encouragement of employee participation, and pay scales aligned with industry norms are the most effective ways to motivate employees (Morris & Maloney). The effectiveness of pay as a sole means of motivation has been challenged in academic literature (Hasan, 2009). Research suggests that pay can only go so far, and that a sense of satisfaction and enjoyment in one's work is the strongest motivator. Performance appraisals that link closely with pay raises and other forms of compensation have been found to be more effective at motivating employees than pay alone (Park, Appelbaum, & Kruse, 2010). One of the latest trends is to give employees incentives for improving their health and reducing absenteeism, thereby avoiding factors that compromise productivity (Donnelly, 2009).

Research also suggests that performance-related pay systems can actually undermine the development of organizational commitment. When goals are not reached, employees may feel incompetent or as though they lack control over their own destiny within the organization. They might feel that despite their best efforts they did not receive the expected pay raise — leading to the belief that putting extra effort into work is pointless because those efforts will go unrecognized. This type of pay system can undermine employees' sense of self-control and their ability to determine their own levels of achievement within the organization.

The best practices method of incentive pay is a normative model that treats all employees equally and does not encourage individual achievement. A key disadvantage identified by Morris and Maloney is the incongruence between pay and reward systems and other areas such as employee selection, training, and performance-based appraisal systems.

Best fit policies carry a different drawback. They are not as static as best practices and are often amended as the company's strategy changes in response to competition. Changing expectations and policies can be frustrating for employees. Best fit policies are a continual work in progress because they respond to shifting business strategies, competitive actions, and changes in management. By comparison, best practices policies can be considered static — they do not change when the organizational strategy changes and do not demonstrate the same capacity for adjustment. This is one of the key differences between the two approaches.

The best fit approach is most effective in the area of attracting employees and improving employee retention (Gordon & Kaswin, 2010). This can be especially problematic during times of economic expansion when labor markets allow for increased employee mobility between organizations. During a recession, companies become increasingly concerned with finding and securing qualified employees (Morris & Maloney). This is where the best fit model holds an advantage over best practices — it allows the company to develop a specific reward package that will attract different types of applicants by tailoring the package to the target audience of candidates they wish to recruit. This flexibility is a key strength of the best fit method.

Studies have confirmed that companies that pay more often attract a higher-quality workforce than those paying average to below-average wages for their industry group (Morris & Maloney). However, sound company policies are also a key component for retaining those employees once they have been recruited. The best practices method focuses on policies that are long-term and seldom changing.

Researchers have found that people do not work solely for money. They are more likely to remain in a job that adds meaning to their lives. Employees in roles that provide meaning are likely to exhibit low turnover rates, and research suggests that employees will stay with a company regardless of pay if they feel the job contributes to their overall satisfaction and quality of life (Hasan, 2009).

Both models have supporters and opponents, though they share agreement that competitive reward packages are a key element in attracting and retaining the best employees (Morris & Maloney). A further point of disagreement concerns which model offers companies the greatest competitive advantage. The best fit model tends to focus on the highest achievers or those who would be most costly to replace. The idea is that employees will be satisfied when their pay package meets or exceeds what they would earn at a competing organization. Best practices, by contrast, supports the idea that a standard set of interrelated policies is the best approach to attracting individuals, holding that all employees should be carefully selected because each one contributes to the organization's competitive advantage.

Expectancy theory holds that people make choices based on their belief that their efforts will lead to a certain level of performance and corresponding reward. Employees must feel that their efforts will produce an outcome they value. Employees may assign different levels of value to different outcomes and prioritize their expectations according to personal preference, particularly in diverse populations (Khan, Farooq, & Ullah, 2010). When individual expectancy is factored into the reward system, it becomes apparent that the best fit model provides the framework to individualize reward systems in order to match the needs and expectations of each employee. Expectancy theory challenges the one-size-fits-all approach of best practices, suggesting it does not produce the highest level of employee motivation. A reward system will only be effective if it happens to align with a given individual's values. Best fit theory supports the idea that rewards must be individualized to meet each person's specific needs if maximum benefit is to be achieved. From the standpoint of expectancy theory, best fit appears to represent the more effective model.

Conclusion: Toward an Integrated HRM Strategy

The purpose of an incentive program is to motivate employees. Employees must feel that the program is equitable and that they can expect fair treatment and proper reward for their efforts. Social norms within the organization also play a role in employees' perceptions of how they have been treated relative to others, thereby affecting the overall effectiveness of the reward system (Festere, 2010).

The question of which model — best fit or best practices — is the better choice for human resources management is closely tied to which one has the greatest positive effect on employee motivation. To answer this question, it is necessary to identify the factors most important in motivating employees. An examination of relevant literature found that employee involvement in decisions surrounding their work environment had the greatest effect on stimulating a sense of ownership. Employees who felt they had some degree of control and played a role in determining their own path within the company were happier and more likely to remain than those who felt unable to influence their work environment.

When one considers the highly competitive atmosphere of the global marketplace, it becomes evident that it is dynamic and ever-changing. Some industries are more affected by these characteristics than others, but all must learn to compete in a dynamic environment. The dynamic nature of this environment calls for human resource strategies capable of adjusting to the needs of the global work environment (Schraeder & Becton, 2011). Consider, for example, a company that wishes to attract a senior executive who has been highly successful at a competitor. To accomplish this, the company will need to offer a package substantially better than the one that executive currently holds — a move that can be integrated into the company's overall strategy.

Using this example, it would appear that the best fit model is more aligned with today's global marketplace than best practices, given its ability to adjust to changing work situations as needed. However, this does not mean that best practices has no place in the global marketplace. Best fit gives management the ability to tailor practices to suit individual employees, but this flexibility may be perceived negatively by employees who fear that differential policies indicate favoritism. This is where best practices holds an advantage.

The question of whether best practices represents an old and outdated approach, as opposed to best fit which represents a newer model, cannot be settled by declaring one superior to the other. The examination of positive and negative aspects of each model makes clear that neither is categorically better. It appears that the best fit model is more aligned with the future needs of organizations competing in the global marketplace — allowing companies to adjust and attract the best talent. However, the best practice model could offer a solid foundation upon which to build best fit policies. Best practices can lay the groundwork and provide guidance for the development of best fit strategies. It does not have to be an all-or-nothing approach; companies can draw on the best aspects of each model to construct a new framework that reflects not merely a compromise, but a strategic combination. Such a model would provide both foundational stability and the flexibility to adjust to the dynamic needs of a changing work environment.

At this time, the best fit model appears more appropriate for today's changing work environment and continuously shifting competitive landscape. Businesses must be able to respond to dynamic conditions, and today's business world emphasizes the importance of alignment with strategic goals — a criterion that best fit satisfies more fully. Nevertheless, incorporating best practices policies to provide solid guidance for all elements of a best fit strategy would make the most sense. This approach would eliminate many of the problems associated with both models and allow businesses to capitalize on the strengths of each.

In conclusion, the best fit model appears more aligned with modern organizations and contemporary approaches to strategy. Simply abandoning best practices, however, is not the answer. The most productive question is which combination of the two is more consistent with research on employee motivation. On these grounds, best fit practices appear to be the stronger choice. Best fit gives employees a greater degree of control over their advancement through individualized performance-based rewards. The best practices model does not always afford employees this opportunity; in many cases, employees fail to receive scheduled raises because of factors beyond their individual control, reducing their incentive to continue performing at a high level. Employees must believe that strong performance will be rewarded. All things considered, the best fit model will have the greatest positive influence on the work environment and will produce the greatest gains in competitive strategy.

References

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Khan, K., Farooq, S., & Ullah, M. 2010. The Relationship between Rewards and Employee Motivation in Commercial Banks of Pakistan. Research Journal of International Studies, Issue 14.

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