The formality and informality of HRM practices in Family Small and Medium-Sized Enterprises.

Current status and directions for future

Abstract

Literature on HRM in family SMEs is still sparse, despite the relevance of human

resources for family SMEs in creating competitive advantage. Liabilities of smallness and

resource constraints make it difficult for family SMEs to attract and retain skilled people

and to implement formal HRM practices. On the other hand, informality helps in

developing a feeling of teamwork and strong social relationships and in increasing

workers’ motivation. Through a review of the existing literature, the paper intends to

capture evidences in family SMEs, between the formal HRM approach and the informal

one and aim to answer to the following questions: 1) In family SMEs, what are the factors

that influence the choice of informal HRM practices versus the formal ones? 2) What are

the contingencies that push family SMEs to formalize HRM practices?

The formality and informality of HRM practices in Family Small and Medium-Sized Enterprises.

Current status and directions for future

Introduction

Literature on Human Resource Management (HRM) in family small-and-medium

sized enterprises (SMEs) is still sparse, as research focuses on large firms (Heneman,

Tansky, and Camp, 2000; Upton and Heck, 1997). Recently, research in small businesses

has increased, but we still know relatively little about HRM practices in family SMEs

(Reid et al., 2002).

Scholars have often stressed the relevance of human resources for family firms in

creating competitive advantage and how important is the effective management of

employees to business success and survival (Astrachan and Kolenko, 1994).

Liabilities of smallness and resource constraints make it difficult for family SMEs

to attract and retain skilled people and to adopt formal HRM practices (Cardon and

Stevens, 2004; Songini and Gnan, 2013; De Kok and Uhlaner, 2001; Heneman and

Berkley, 1999; Aldrich and Langton, 1997). Within an organization, the terms “formal

HRM practices” refer to the extent to which: 1) a rule or a procedure is written in a

document; 2) a rule or a procedure are systematically applied; 3) the employer assure that

an activity should take place. Further, formalization refers also on how HRM practices

conform to legal requirements, comply with professional standards and are properly

validated against some performance criteria (De Kok and Uhlaner, 2001).

The resistance of the owner-managers that consider formal HR practices not

beneficial (Matlay, 1999; De Kok et al., 2006) is another cause for their non adoption.

SMEs should be flexible and informal in order to cope with higher levels of environmental

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uncertainty (Hill and Steward, 1999). Informality (Mayson and Barret, 2006) helps in

developing a feeling of teamwork and strong social relationships and in increasing

workers’ motivation (Marlow and Patton, 2002). Employees may also feel they benefit

from the informality of the workplace as they can negotiate work responsibilities, hours, as

well as secure personal loans and other forms of aid (Marlow and Patton, 2002). On the

other hand, employees’ believe in consistency and fairness is crucial in gaining their

commitment (Wilkinson, 1999). Informality of personnel management is often considered

an implicit assumption and it appears to be a peculiar feature of family SMEs.

Nevertheless, when grievance and discipline issues emerge, people may perceive informal

practices as an arbitrary and unfair choice. Therefore, facing these tensions, balancing both

formal and informal practices becomes one of the greater challenges for family SMEs.

Through a review of the existing literature in order to investigate the adoption in

family SMEs of the six main sets of HRM practices (recruitment, selection, training,

performance appraisal, compensation, and industrial relations), the paper intends to capture

evidences on the relative approach, between the formal and the informal one, within these

organizations. Therefore its aim is to provide answers to the following questions: 1) In

family SMEs, what are the factors that influence the choice of informal HRM practices

versus the formal ones? 2) Conversely. what are the contingencies that push family SMEs

to formalize their own HRM practices?

Literature showed that in the scientific debate five theoretical frameworks apply:

company growth theory, resource-based view, agency theory, institutional theory, and

equity theory. The main goal of the paper, therefore, is to reconstruct a theoretical

framework through a literature review and, at the same time, to reorganize issues that are

still ambiguously determined or insufficiently addressed. Further, some considerations on

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the development of future research strategies will be used to try to contribute to the

scientific debate.

The paper proceeds in three sections. It starts by describing the methodology for

the literature review with particular attention to the strategy used to select the studies

included in the systematic review. In the second section the main findings of the review are

reported, whereas the fourth section discusses the emerging conclusions and draws some

implications for future research.

1. Methodology

The literature review process is arguably a good tool to understand developments in

research and bring to light the empty spaces that in the future could be object of

exploration, but it often suffers from incompleteness (Tranfield et al., 2003). Thus, this

paper is not conceited to be a perfect reconstruction of the evidence produced so far,

neither this is its principal aim. Although its limitations, it intends to identify specific

contributions in order to highlight the mainstreams of the scientific debate on HRM in

family SMEs.

We followed the stages of systematic review recommended by Tranfield et al.

(2003): (1) planning the review, (2) conducting the review, (3) reporting and

dissemination. In the planning stage, we defined a review protocol (Davies and Crombie,

1998) based on the questions and goals previously stated and containing information on the

search strategy for the identification of relevant studies, the criteria for inclusion/exclusion

of these studies in the review, and the sample selected. The sampling of articles on HRM

and family SMEs was made through a search of keywords in the titles and abstracts of

articles in the most relevant databases for social sciences research: Business Source

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Premier (EBSCO), EconLit (EBSCO), Emerald Fulltext, JSTOR, Science Direct

(Elsevier), Scopus (Elsevier), SpringerLink, SSRN-Social Science Research Network, Web

of Science (ISI), Wiley InterScience Journals, EconPapers, Sage Journals, Questia.

The string search was focused on various combinations of the following keywords:

family firm, family business, family owned-firm, small firm, small and medium sized

firms, HRM, HR practices, personnel management, recruiting, selection methods,

compensation, wages, benefit, incentive pay, performance appraisal, career management,

incentives, negotiation, industrial relations, labour relations, workforce, employee,

employment. A time range of observation from 1980 to date was adopted. 353 papers were

included in the first sample.

After reading the contents of the 353 papers included in the first sample, 40 papers

were finally selected according to the work’s aim. The articles were excluded if they

simply related firms to a kind of HRM style without in-depth investigations, they

theoretically dealt with HRM issues without any reference to practices or they examined

large and/or publicly-owned family businesses. The final sample thus obtained was

composed of papers strictly dealing with informality and/or formalization of HRM

practices in one or more of the five categories of recruitment, selection, training and

development, compensation and performance appraisal. Both papers specifically focused

on family SMEs and those concerning with SMEs in general were included in the sample

because of the scarce number of contributions only addressed to family firms.

Even if most of articles (23 out of 40) have been published since 2000, a

considerable number are from the ‘90s and just three before. The journal with most overall

contributions is the Journal of Small Business Management (9), while Family Business

Review is referring to family SMEs. Table1 shows in detail the distribution of the articles

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selected by source, decade of publication and firms sampled, distinguishing between

family and non-family businesses.

Looking at the contents, respectively recruitment, selection, training, performance

appraisal and compensation were the HRM topics most examined in the context of SMEs

and in that of specific family firms alike, as shown in Table2. The most analyzed countries

were USA, UK and Australia, but also Ireland, Canada and Netherlands received some

attention.

Table 1: Distribution of the papers by decade, source and type of firms sampled

  FB NFB FB NFB FB NFB  Journal

‘80s ‘90s 2000 to date Total

Asia Pacific Journal of Human Resources     2 2

Education + Training Journal     1   1

Employee Relations   1 3   4

Entrepreneurship Theory and Practice     1   1

Family Business Review   2   2   4

Human Resource Management     1 1

Human Resource Management Journal   1 1 2

Human Resource Planning     1 1

International Business and Management     1   1

International Journal of Human Resource Management     1    1

International Small Business Journal     1 1

Journal of Business Research     1   1

Journal of European Industrial Training     1   1

Journal of Family Business Strategy     1   1

Journal of General Management 1       1

Journal of Small Business and Enterprise Development     1 2 3

Journal of Small Business Management 1 5 2 1 9

Organizational Dynamics 1        1

Personnel Psychology   1   1

Personnel Review     1 1

Small Business Economics     1 1

Work, Employment & Society     1       1

Total F 2   4   12   18

Total NF   1   10   11 22NFB: non-family businesses (small and/or medium sized)FB: family businesses (small and/or medium sized)

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Table 2: Ranking of contributions by topics and type of firms sampled

Recruitment

Selection

Training and

development

Compensation

Performance Appraisal

Family SMEs 5 5 4 4 3Non-family SMEs 16 14 12 9 8Total 21 19 16 13 12

2. HRM in family SMEs: informal versus formal practices

Although, the contribution of family SMEs to national economies is now widely

recognized and research pays more attention to their managerial issues, the existing

literature about HRM in family SMEs is still poor. In particular, very few studies

investigate how family firms adopt HRM practices.

As far as SMEs are concerned, research attempt to describe their HRM systems

and it makes no distinction between non-family and family ones, despite the acknowledged

prevalence of the latter ones. In empirical papers, survey samples are far from being

homogenous, thus their conclusions are often simplistic and actually inapplicable for all

kinds of businesses. Family SMEs face unique and complex HR issues due to the overlap

between ownership and management, ranging from hiring non-family members to

managing and compensating both family and non-family employees in a fair way.

Contributions about HRM practices in SMEs that explore in-depth family

businesses’ peculiarities are significantly fewer than those that completely omit family

firms’ issues. In the next paragraphs, we will couple the findings of wider-approach studies

on HRM in SMEs, with research that exclusively investigates on informality and

formalization of HRM practices in family SMEs. We will analyse the state of the art about

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current knowledge, both on the informal HRM practices’ implementation in family SMEs,

and on a more formal HRM approach in family SMEs.

The informal approach to HRM in family SMEs

Literature suggests that HRM in family SMEs tends to be informal and remains a

domain of the owner-manager (Matlay, 2002). Research usually describes HRM practices

in SMEs as informal ones compared to those adopted by large firms, often regardless of

different size and strategies within similar firms. Many papers even argue about

management style of small against large firms, including medium enterprises in the former

group. On the other hand, some contributions explore how the degree of informality may

vary among SMEs and between family and non-family ones, alike.

HRM policies

Most of SMEs don’t have a personnel or a HRM department/manager, whose

presence is normally associated with formal attracting methods (Heneman and Berkley,

1999; McEvoy, 1984; Wagar, 1998). Comparing HRM practices of 133 family SMEs in

Northern Ireland with respect of 86 non-family ones, Reid and Adams (2001) revealed that

non-family SMEs present an higher percentage of presence of a personnel or a HRM

department/manager rather than their family counterparts, but less than 50 per cent of both

family and non family SMEs reported that the head of HR did not have a sit on the board.

Consequently, in SMEs, HR top managers are generally not involved in the strategic

formulation processes, endorsing research, that found that other managerial department

heads take precedence over the ones of HR (McEvoy, 1984). Furthermore, Reid and

Adams’s (2001) findings reported a higher percentage of non-family SMEs negotiated with

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trade unions on pay and conditions, confirming the negative attitude of family SMEs

toward unionization (Donckels and Frohling, 1991). As well as the presence of a HR

department, also the unionization status of the firm is a driver of the adoption of HRM

practices. The majority of non-unionized SMEs present less formal policies, have fewer

methods for resolving disciplinary issues and staff grievance, and are more likely to

encounter health and safety problem (Dundon et al., 1999). On the other hand, unionized

SMEs are significantly more likely to have an employee pension plan, an employee

assistance program and a formal performance appraisal system (Wagar, 1998). Anyway,

research on SMEs indicate a low presence of trade unions, mostly attributed to tough

opposition on the part of owner-managers. Since trade unions are viewed as a constraint on

managerial legitimacy or deemed unnecessary, a combination of HRM practices that may

soften the workplace edges are often promoted as a substitution for union activity (Harney

and Dundon, 2006). In non-unionized family SMEs, although unionization would be

beneficial to employees, workers find the presence of unions less attractive, since the

family environment develops an informal social setting that facilitates friendly

relationships and increases the unpleasant experience of managerial authority (Dundon et

al., 1999). On the other hand, in a context of anti-union sentiments by owner-managers,

employees are cautious in fearful of potential managerial reprisal (Dundon et al., 1999).

Recruitment and selection

Looking at HRM systems in SMEs, research focuses on recruitment and selection,

as appointing the right staff is the greatest challenge in SMEs and one of the most frequent

complaints heard from employers.

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Although SMEs need to attract potential employees to fuel their growth, often

recruitment strategies are on a sporadic, ad-hoc basis. Recruiting primarily involve use of

convenient, inexpensive, and directly controllable sources (Heneman and Berkley, 1999).

The most widely used recruitment methods are press advertisements, word-of-mouth and

recommendations from staff (Baines and Wheelock, 1998, Barber et al., 1999; Carrol et al.,

1999; Hornsby and Kuratko, 1990; Ram and Holliday, 1993; Reid and Adams, 2001). The

rationale for employing friends and family members form the existing staff includes the

belief that a member of the actual staff is unlikely to recommend unsuitable people, the

preference for a known quantity and valuing someone who would fit in (Carrol et al.,

1999).

Against their advantages in terms of cost and speed, informal methods may leave a

pool of suitable recruits untapped and may leave the firm open to accusation of indirect

discriminations (Carroll et al., 1999). Moreover, the lack of formal recruitment practices

often entails situations that may be wasteful for the business. Ram and Holliday (1993)

point out instances where management felt an obligation to employ family members

despite there not being a pressing need for new workers in a strictly economic sense.

Whereas family ties ensure a supply of reliable workers prepared to work for long hours

and resolve the problems of trust and delegation, on the other hand, they can serve also as a

constraint upon management (Ram and Holliday, 1993).

Reid and Adams’s (2001) show that managerial vacancies in both family and non-

family groups may be filled through advertising in national newspapers, but a higher

percentage of family SMEs recruited managerial vacancies internally. The reliance on

internal labour market is common source, not only because of costs, but also as an insider

is already cultivated into the organizational model (Carrol et al., 1999). The small

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importance of job posting and bidding as sources of recruitment confirms that SMEs don’t

make much use of external sources, such as employment agencies and educational

institutions, although they may provide a rich source of talents (Deshpande and Golhar,

1994). In summation, SMEs tends to rely heavily on trusted and simpler recruitment

techniques without the requirement of experts that reduce the risk and the uncertainty

which is typically associated with hiring new recruits (Carrol et al., 1999).

Although selection issues are addressed, even if in different ways from the more

formal, procedural approaches followed by large firms (Cassell et al., 2002; Bartram,

2005), even formal selection processes are rare in SMEs. Selection procedures are largely

based on the personal appraisal of the owner-manager and the most common selection

tools are one-on-one interviews and job tryouts (Deshpande and Golhar, 1994). Non-

instrumental dimensions, such as person-organization fit, values, norms and beliefs of the

organization and the applicants are also considered in the selection decision. SMEs

managers focus on the match of applicant profile to the general needs and culture of the

firm rather than to the specific job requirements. Ram and Holliday (1993) state that

application forms or formal interviews are rarely used in family SMEs, as the latter ask

newcomers to bring, not only professional competences, but also the ability to fit into

existing norms of workers and management. Finally, Reid and Adams’s (2001) evidence

differences between family and non-family SMEs, reporting an higher percentage of non-

family SMEs using references as a selection method.

Therefore, the need for in-depth screening is reduced and selection methods are

applied less frequently when potential employees are more likely to be relatives or friends.

Consistently, Astrachan and Kolenko (1994) argue that formal entry requirements were

rarely used for family members.

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Training and development

Training and development are the second most explored HR topics in the context of

SMEs after recruitment and selection, probably due to their relevance to the success of the

business, mostly in those firms where employee roles and responsibilities are not well

defined and shift rapidly (Kotey and Folker, 2007; Carlson et al., 2006)

Nevertheless, formal training is less likely to be provided in SMEs. Whereas, as far

as size is concerned, medium-sized non-family firms place greater emphasis on formal

employee training and development than similar family firms (Kotey and Folker, 2007).

Therefore, training in SMEs is mainly informal, with little or no provision for management

development (Kotey and Slade, 2005; Kotey and Sheridan, 2004). SMEs rarely carry out

formal training needs analysis and have no formal scheme, neither systematic approach to

training (Kotey and Slade, 2005; Kotey and Sheridan, 2004; Bartram, 2005). The most

followed approach for its provisioning is selecting a training that is particularly tailored for

an identified need. Often training is both focused and targeted only according to perceived

needs (Cassell et al., 2002). Anyway, Reid and Adams’s (2001) report that non-family

SMEs are more concerned about analyzing employee training needs and about involving

employees in training activities. Nevertheless, on-the-job training is the predominant

method applied both by family and non-family SMEs (Kotey and Folker, 2007).

Referring to training providers, family SMEs are less likely than their non-family

counterparts to use outside professional trainers, structure their in-house programs, or enrol

employees in university courses (Kotey and Folker, 2007).

Despite the adoption of formal, structured and development-oriented training with

respect of the increase of the size of the firms, training practices remain informal in the

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majority of SMEs, particularly in smaller ones (Kotey and Folker, 2007). SMEs, including

family and non-family ones, often consider formal training as an unaffordable cost

compared to their limited financial and human resources (Kotey and Slade, 2005; Kotey

and Sheridan, 2004). Actually, they do not only incur the cost of the training, but also the

opportunity costs of the trainees either being away from their place of work or being

unable to conduct their normal duties (Storey and Westhead, 1997). Moreover, their less

opportunities for internal promotion and the lack of possibility for higher wages may

expose SMEs to losing managers once they receive formal training (Storey and Westhead,

1997). Since family SMEs are often considered less attractive employers for their lower

wages and their aptitude to offer promotional opportunities to family agents, they can be

particularly exposed to this risk. That being so, owners tend not to invest in training

managers. Moreover, resulting in a highly specialized staff, formal employee training is

perceived as unfitting to SMEs’ need of a multi-skilled workforce able in solving different

problems (Kotey and Slade, 2005; Kotey and Sheridan, 2004). This is mostly true for

family SMEs as they emphasize technical skills rather than managerial ones. Less

competent family owners perceive the development of the managerial competences of

subordinates as a threat for their power (Kotey and Folker, 2007). A further reason why

SMEs do not provide managerial training is the belief that it does not enhance the

performance of the firm. However, this is mainly the result of ignorance of the benefit it

can bring (Storey and Westhead, 1997; Songini and Gnan, 2013).

Compensation and performance appraisal

Even though compensation topic is a little less investigated than training, it receives

a considerable attention, as rewarding practices significantly affects both recruiting and

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retention efforts of critical skills and knowledge and firm performance (Carlson et al.,

2006).

Compensation involves a series of decisions a firm makes concerning payment of

its workers, including pay levels, pay mix between salary, benefits and incentives, pay

structure, and pay raises. In SMEs, also the compensation policies tend to be informal.

SMEs rarely use formal salary surveys of the relevant labour markets to assure that their

pay levels are competitive (McEvoy, 1984). Moreover, SMEs do not use formal job

evaluation systems to assure that their pay structures are internally fair (McEvoy, 1984).

This behaviour is reflects their flat organizational structures with few hierarchical

managerial levels. Therefore, SMEs tend to treat all the employees in an similar way with

regard to compensation and rewards. In family SMEs pay dispersion is even more unlikely

to occur because of the additional influence of altruistic principles on compensation

decisions (Ensley et al., 2007). Therefore, in family SMEs compensation policies are often

characterized by lack of transparency, which in turn results in perceptions of unfair

compensation distribution (Ensley et al., 2007). References to equity theory are quite

evident (Carrell and Dittrich, 1978). The amalgam of economic and altruistic

motives, that lead family SMEs to replace the merit norm with need and equality criteria

and consequently to adopt less formalized practices, may entail pay allocations that

employees difficultly understand. Although formal compensation policies are more likely

to produce compensation dispersion, they also increase trust and justice perceptions, at

once. To the extent that different rewards may be tolerated when more competent

employees are paid more, only pay decisions backed by formal performance-based

standards may be better accepted (Carrell and Dittrich, 1978).

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Pay raises are one of the most widely-used motivation technique in SMEs, but they

are somewhat far from be systematic and mainly the amount is not related to productivity,

due to the owner-managers’ inability to develop a formal pay incentive plan that is easily

administered and readily understood (McEvoy, 1984).

Research underlines that compensation informality is also associated with the

informal pay negotiation processes occurring between employers and employees in SMEs.

Instances of individualised pay bargaining were found in both family and non-family

SMEs (Ram, 1991; Moule 1998), but opposing cases of fixed pay with no negotiation

possibility (Dundon et al., 1999) suggest that this process is probably not related to the

family nature of the firm and its size, rather it may depend on industry and its specific

laws.

Compensation policies are often related to appraisal systems. Overall, the most

common appraisal methods within SMEs are narrative descriptions of employee

performance, assessment of their ability to meet targets and the use of rating scales

(Hornsby and Kuratko, 1990). Owner-managers of SMEs usually have not the skills to

carry out effective performance reviews and may perceive formal performance appraisal

system as time consuming (Kotey and Slade, 2005). Although some appraisal processes are

adopted, generally formal systems are rare in SMEs (Cassell et al., 2002; Bartram, 2005).

Working alongside employees, owner-managers can directly observe activities and

intervene on wrong performances almost immediately, so performance appraisal mainly

tends to be informal and continuous (Neeson et al., 2007). Furthermore, the relative small

number of managers and their ties with the owners may explain why appraising

management is less likely to occur in family SMEs.

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Nevertheless, Reid and Adams (2001) report that formal appraisal systems for

managers and clerical staff are more employed by non-family SMEs, as well as formal

reward mechanisms, supporting the more “business first” ethos for non-family SMEs and

the “family first” for family ones. Family SMEs use individual pay bonus rather that well

designed systems, especially for family managers, whereas non-family SMEs rely on merit

or performance pay (Reid and Adams, 2001). Such a different management of family and

non-family employees may result in tensions. Rewards not based on performance can

create difficulties for other non-family managers. That’s why management and ownership

should be separate. It would entail rewarding relatives working in the firm strictly on the

basis of business principles, while any additional rewards would be allocated under the

ownership umbrella independently from the relative’s standing in the firm (Lansberg,

1983). The establishment of structures and processes which separate management and

ownership can be helpful, as in compensation, also to effective selection, appraisal,

training and promotion, that may reduce further conflicts within the family SME.

Even if evidence suggests that compensation practices in SMEs are overall

uncoordinated and ad hoc, on the other hand a total reward perspective, where

compensation includes psychological in addiction to monetary rewards, may bring to light

the specific benefits SMEs provide. First of all, the more relaxed environment typically

associated with SMEs, both family and non-family ones, is often perceived as important as

monetary rewards (Dundon et al., 1999).

Theoretical foundations on the adoption of informal HRM practices in family SMEs

In summation, literature provides evidences of a large adoption of informal HRM

practices within family SMEs, and SMEs in general. Moreover, studies comparing family

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and non-family SMEs highlight that family firms less invest in implementing HRM

practices than non-family ones, suggesting that the overlap of family, business and

ownership reduces the adoption of more formal practices (De Kok et al., 2006).

According to agency theory, family involvement implies a smaller tension in

adoption formal HRM practices for aligning managers’ behaviours (Kotey and Sheridan,

2004; Reid and Adams, 2001; Astrachan and Kolenko, 1994; Ram and Holliday, 1993;

Geeraerts, 1984).

At the same time, organizational control theory points out that clan and social

control systems are more effective than the bureaucratic and administrative ones when, in

organizations, a small group of people sharing common values and highly coordinated

through personal ties manage strategy, decision-making, and power. That being so,

distinctive features of family SMEs, as family involvement and the presence of kinships,

may be supportive to a reduced emphasis on formal systems. Whereas the involvement of

the family reduces the need of bureaucratic controls, the social interactions among family

members allow the use of informal and cultural mechanisms that substitute or complement

the formal administrative systems, including traditional HRM systems (De Kok et al.,

2006).

Finally, consistently with the assumptions from the institutional theory, family

SMEs are less likely to adopt formal HR practices, since they mainly attract and select

family, friends or trusted employees (De Kok et al., 2006). The availability of a known

individual is often a precondition for recruitment and the ability of "fit in" is a significant

entry requirement, even more than qualifications (Carroll et al., 1999). Gaining legitimacy

from other job applicants is thus unnecessary for family SMEs. In addition, in family

SMEs the employer legitimacy may derive less from the formal approach he operates

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HRM practices, but more from how family ties and friendships are managed (De Kok et

al., 2006).

Anyway, from a resource-based perspective, research states also that the limited

financial, human and organizational resources of family SMEs involve the use of less

formal HRM practices (Kotey and Folker, 2007; Reid and Adams, 2001; Ram and

Holliday, 1993; Hendry et al., 1991), and, additionally, the lower organizational

complexity makes them unnecessary (Zhang and Ma, 2009; Redding, 2005). It is widely

acknowledged that firm size is an important predictor of HRM adoption and that affects the

sophistication of HRM methods (Hornsby and Kuratko, 1990; Wagar, 1998), as well as

small size means resource and capability constraints that hinder the implementation of

formal HRM practices. Adopting formal HR practices often requires upgrading the firm

structure, which is a prohibitively costly investment for small firms (Patel and Cardon,

2010) and an impractical project because of their competences’ lack. SMEs implement

more formal HRM practices when they increase their size, but the trend declines in the

latter growth stages (Kotey and Slade, 2005; Kotey and Sheridan, 2004).

A further explanation on the relationship between family involvement and the

adoption of formal HRM practices stems from the company-growth theory (Kotey and

Folker, 2007; Kotey and Slade, 2005; Kotey and Sheridan, 2004; Songini and Gnan, 2013;

Chandler and McEvoy, 2000). Firm size is positively related to HRM specialization, that is

the presence of a HRM department and/or manager (Kim and Gao, 2010), which in turn is

associated with greater knowledge resources (Klaas et al. 2000; Hendry et al., 1991). Since

organizational complexity increases as firms get larger and, in turn, it entails a gradual shift

toward a more professional approach, the lack of formal HRM practices within family

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SMEs is associated to a less relevance, than to an ineffective management due to resource

and capabilities’ unavailability (De Kok et al., 2006).

Finally, growth and development of family SMEs are likely to be stunted, to the

extend that they are dominated by a founder who is unwilling to allow the firm to grow if

this means a loss of personal control (Daily and Dollinger, 1991). Moreover, whereas non-

family SMEs need to acquire, develop and deploy resources from outside in order to

achieve their profit and growth goals, family SMEs may have gradually additional resource

of family skills and involvement. Consistently with the long-term orientation and goals of

family SMEs, it implies the chance to slowly increase the adoption and implement more

formal methods, as long as the family expands (Kotey and Folker, 2007).

The formalization of HRM practices in family SMEs

The overall picture emerging from research shows that HRM practices in family

SMEs are mainly informal and the mainstream theories seem to support this approach as a

organizational fit to the unique features and goals of family SMEs. However, within

specific circumstances, research also carries the adoption of more formalized HRM

practices.

To the extent that information are likely to be unique snapshots of family SMEs,

empirical studies are often only static representations of reality and occurring changes are

usually not properly caught. Moreover, most of research on HRM is not yet focused on

describing differences among different family SMEs, although HRM practices that shows

higher percentages of adoption are naturally extended to all similar firms. Since actual

literature mostly focuses on HRM in large family firms and the attention toward SMEs is a

relative recently novelty, the aim of research on family SMEs is to scrutinize and to

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identify the peculiar features of these firms. However, SMEs are far from being an

homogeneous group and differences in managing, even HRM issues, obviously occur.

Research acknowledges that family SMEs present complexity and unevenness dimensions

and that they encompass firms of various sizes, as well as it recognizes that these topics

result in complexity, heterogeneity and variance of HRM practices (Harney and Dundon,

2006; Kotey and Slade, 2005; Ram, 1999; Ram and Holliday, 1993).

Besides many contributions based on HRM informality, some studies suggest that

HRM practices in SMEs are more sophisticated and formal than it would be expected

(Golhar and Deshpande, 1997; Hornsby and Kuratko, 1990). For example, exploring over

600 family SMEs, Astrachan and Kolenko (1994) found that, with the only exception of

formal entry requirement for family members, more than half of the sampled firms had

regular and formalized employee review processes, compensation plans, written employee

policy manuals and written job descriptions. However, these findings often do not generate

enough attention, rather sometimes they result in simple quantitative/qualitative

descriptions (Wiesner and Innes, 2010) and in negligent conclusions. In family SMEs, thus

the formality dimension of HRM practices is more a subjective and qualitative discussion

rather than a systematic empirical analysis. In-depth investigations are really scarce, even

more referring to family SMEs and very few works are specifically aimed to understand

what factors shape HRM and lead to its formalization.

In the previous section, we reported that some internal elements, such as the

presence of a separate HR department and the status of the firm with respect the unions,

are positively associated with the adoption of more formal HRM practices (Heneman and

Berkley, 1999; McEvoy, 1984; Wagar, 1998). At the same time, we discussed that, as far

as SMEs are concerned, these are rather indicators of HRM informality, because of their

20

overall absence (Harney and Dundon, 2006; Dundon et al., 1999; Heneman and Berkley,

1999; McEvoy, 1984).

The family ownership itself is a constrain to the HRM practices’ formalization (De

Kok et al., 2006; Kotey and Folker, 2007; Reid and Adams, 2001), nevertheless it seems

valuable to understand to what extent other factors may interplay and lead to the

implementation of more formal practices also in family SMEs.

Internal contingencies, however, are not the only drivers for the adoption of formal

HRM practices. Existing research suggests that a complex interaction of both internal and

external contextual factors shapes HRM practices and influences their formalization within

family and non-family SMEs.

Internal contextual factors to the adoption of formal HRM practices in family SMEs

Thus far, research mostly examined the relationship between HRM practices and

firm size. This relationship is widely associated with the adoption of HRM practices, and

in particular empirical evidence suggest that the larger the firms, the more they apply

formal HRM practices (De Kok and Ulhaner, 2001; Hornsby and Kuratko, 1990; Nguyen

and Bryant, 2004; Wagar, 1998).

Bureaucratic practices, which refer to those traditional aspects of HRM that firms

use to manage human capital in a systematic and formalized way, such as formal

performance appraisal systems, handbook, formal selection procedures and standard

written policies or guidelines for task performance, are more likely to be used in the larger

firms among SMEs (Kaman et al., 2001). Company size is also positively correlated with

formalization of training programs (De Kok and Ulhaner, 2001; Chandler and McEvoy,

2000) and formalized outcome-based pay systems (Chandler and McEvoy, 2000).

21

Besides confirming the implementation of formal methods in larger firms within

SMEs, these studies report a particular pattern of HRM formalization. In SMEs, the

relationship between size and HRM formality is not linear, as differences between micro

and SMEs are significant, although not between SMEs themselves (Kotey and Slade, 2005;

Kotey and Sheridan, 2004).

HRM formalization results necessary as long as the number of employees increases

and when the owner-managers become distanced from them, respectively for consistent

application of HRM practices and fair treatment of employees, and for purpose of

accountability as owners lose the control of operations. Therefore, administrative controls,

disguised as appointment letters and detailed records on each employee, replace direct

control of the owner-manager. These are added to a higher number of performance

appraisal methods, especially for the managerial level. As the span of control increases,

appraisals become more formal and occur at longer intervals (Kotey and Slade, 2005;

Kotey and Sheridan, 2004).

To the extent that a larger size can be the result of a specific strategy, strategy itself

may influence the formalization of HRM. Overall, growing small firms are more likely

than non-growing firms to use formal HRM practices (Barrett and Mayson, 2007). Making

the firm more transparent, and therefore, more attractive to employees (Nguyen and

Bryant, 2004), these practices are useful to develop a competent employee base. These

practices are further necessary if the firm needs to exploit or maintain a competitive

advantage, as well as to cope with the increase in complexity resulting from an increasing

number of employees.

As firms grow, they may exhaust informal staffing contacts such as family

members, referrals and walk-ins, and they need to develop more strategic methods to

22

recruit employees with skills and knowledge to sustain growth (Williamson, 2000). In

particular, growing family SMEs, often lacking talented members, are unlikely to be able

to staff all the key positions and have all the necessary skills. Therefore, out of necessity,

they will look outside the family for help or attempt to broaden the skills of family

members (Dyer, 1989). Growth-oriented smaller SMEs, where employing new people

nurtures expansion or diversification strategies, are thus more likely to use formalized

recruitment practices than non-growing ones (Barrett and Mayson, 2007). Besides this,

they are also more likely to adopt formal selection practices, such as lists of skills and

qualifications desired and job descriptions; to use a range of rewards for performance to

engender employee commitment, including additional time-off, bonuses, incentives and

promotions; and to pay for off-site training or work-related education for employees

(Barrett and Mayson, 2007). Moreover, growing family SMEs regularly employ

performance appraisals (De Kok and Uhlaner, 2001).

The close relation between HRM formalization and a growth-oriented strategy is

further confirmed from some evidences of mixed formal/informal methods even in micro

businesses, which are generally associated with complete informality (Matlay, 1999). The

interchangeable use of different HRM practices suits the owner-manager’s desire to growth

and the reluctance to relinquish control of specific managerial functions, at once.

Therefore, in these firms both formal and informal channels of recruitment are used, but

operatives and workers are usually recruited through the owner’s extensive personal

networks, whereas technical and managerial staff are targeted through employment

agencies, recruitment fairs or media advertisements (Matlay, 1999).

Although, according to the company growth theory, all the above evidences support

that formalization of HRM policies becomes desirable as firms grow, we should remind

23

that the concept of growth in family SMEs is somewhat different and should be referred

both to the business and the family. Broader considerations are therefore needed in order to

better understand HRM formalization process within family SMEs.

Leon-Guerrero et al. (1998) find how utilization of a broad set of practices shifts

throughout the development of a family SME. With specific reference, they confirm the

relationship between business growth and the adoption of formal HRM practices.

According to agency theory, since bureaucratic mechanisms, such the use of

incentives, limit opportunistic behaviours and foster the alignment of interests between

agents and principals, the establishment of formal incentives systems is useful to deal with

self-serving non-family employees who join the firm (Songini and Gnan, 2013). On the

other hand, the involvement of different family generations supports the assumption of

lower agency problems in family businesses and a less need of formal controls and

incentive systems, because of the presence of shared interests among members of the same

family (Leon-Guerrero et al., 1998). Actually, family firms must cope with peculiar agency

costs (Songini and Gnan, 2013). Formal merit-based incentives plans help to avoid

opportunist behaviours of free-riding, shirking and perquisites consumptions from family

members and further improve non-family employees’ perception of justice, at once.

In summation, the implementation of formal HRM practices increases with

business development, but it is not affected by family growth.

On one hand, if an increasing size calls for the formalization of HRM practices, on

the other hand, however, its likelihood depends on the recognition from the owner-

manager of the need for delegation and from the concrete possibility of delegating that task

(Barrett and Mayson, 2007). This choice implies (re-)drawing power relationships and the

managerial structure of the firm, which in turn is one of the others internal factors that

24

significantly influence the implementation of formal HRM practices within SMEs (Neeson

et al., 2007; Harney and Dundon, 2006).

To the extent that owners mostly count on their intuition to make decisions and on

their charismatic behaviour to motivate workers (Dyer, 1989), in family SMEs where they

keep control and remain the sole locus of all decision-making, HRM practices mainly tend

to be more informal (Harney and Dundon, 2006). Such a people management style,

described as paternalistic, rely more on a personal approach and less on formal written

policies, in order to engender loyalty from employees, emphasizes trust, and ensure a

relaxed informal social atmosphere (Kotey and Folker, 2007). This harmony, however, is,

at times, juxtaposed by an authoritarian streak (Harney and Dundon, 2006), since

informality does not disguise or smooth away the power relations that shape managerial

processes (Ram et al., 2001), and it may also set out longer hours and harder work. The

widespread, but too simplistic association of informality with harmony, is so denied.

However, in those family SMEs where the owner-manager chooses to delegate

some of his tasks, HRM practices tend to be more formal (Harney and Dundon, 2006), as

almost all decision-making powers rest with the HR manager, who mostly relies on logic

and rational analysis rather than on intuition and he is mostly impersonal in his interactions

with others (Dyer, 1989). A lot is laid out in manuals and policies, and ad hoc consultation

occurs with only those managers present at the time the HR manager feels decisions are

required (Harney and Dundon, 2006; Dundon et al., 1999).

Despite above findings support the influence of the managerial structure over HRM

practices’ adoption also in family SMEs, however HRM formalization is less likely to take

place in family SMEs or occurs to a less extent than their non-family counterparts, as

25

generally family owners are particularly reluctant to give up personal control and to

delegate tasks to others (Kotey and Folker, 2007).

External contextual factors to the adoption of formal HRM practices in family SMEs

Apart from organization structures, environmental external factors are significant

determinants of HRM practices’ configurations as well. In particular, intense product

market competition, dependency and relationships with customers or suppliers, and

legislation lead SMEs to implement formal HRM policies and methods (De Kok and

Uhlaner, 2001; Harney and Dundon, 2006; Nguyen and Bryant, 2004; Patel and Cardon,

2010).

However, research recognizes that these relationships are often based on direct

interviews on a very small number of SMEs and none of the studies is specifically

addressed to investigate potential peculiarities of family SMEs. Categorizations are

somewhat difficult as well as simplistic when dealing with environmental contingencies,

and, moreover, setting collective behavioural trajectories is far from being possible. The

strict interaction between external factors and specific internal structures of single SMEs

results in extremely different and, at times, even contradictory HRM practices, also among

similarly sized businesses. Firms, even similar ones, never react in the same way to

external pressures, with the only exception for legal prescriptions. These, anyway, usually

force to uniform behaviours companies belonging to the same industry, independently

from being a family SME or not.

Anyhow, pointing out the previous limits, research theorized some findings and

provided overall predictions on the interaction between external factors and HRM

decisions in family SMEs.

26

That being so, product-market can then be listed among those external factors

affecting the adoption of HRM practices within SMEs. In particular, intensive competition

may prompts SMEs to implement more formal methods (Patel and Cardon, 2010). Since

they are often labour intensive, SMEs rely on their workers in order to survive in highly

competitive marketplaces, and they focus on an effective management to maximize

employee productivity (Patel and Cardon, 2010). If on one hand, informality in HRM

practices, rather than lengthy procedures and consistent policies, generally could be a

source of competitive advantage for SMEs operating under external uncertainty and

looking for flexibility in order to stay competitive, on the other hand, the interaction and

the intense competition also with larger firms may push SMEs toward applying a higher

level of HRM formality (Nguyen and Bryant, 2004). To the extent that SMEs often take

orders from larger firms and, in turn, the latter squeeze the margins of their smaller

subcontractors (Marlow and Patton, 2002), consequentially owners of SMEs adopt formal

controls over their labour processes in order to increase their efficiency. Moreover, SMEs

and larger firms do not only compete for customers, but also for good employees, and

since these often prefer larger firms as they offer a greater job security and better terms and

conditions (Marlow and Patton, 2002), SMEs are likely to adopt appropriate HRM policies

to match with their competitors. This assumption is valid for family SMEs as well, even

when family members lack the skills required from the context.

Nevertheless, research shows evidence of SMEs avoiding the formalization of

HRM practices in spite of intense competition in their referential marketplace (Patel and

Cardon, 2010). Given the resource and capability constraints of SMEs and their lacking of

learning capabilities, adopting formal HRM practices may not always be possible and often

it is too costly. Thus, the costs associated with developing formalized HRM practices

27

should be balanced by potential benefits from such actions (Sels et al., 2006). However,

since the organizational changes following the adoption of formal practices negatively

affect employee turnover, reduce motivation, increase stress and lead to increased shirking

due to greater autonomy and coordination costs, HRM formalization cannot even be

considered beneficial by SMEs, which per se face significant retention problems (Patel and

Cardon, 2010). Thus, it becomes necessary to invest in the organizational culture, to

encourage the implementation of formalized HR methods. In particular organizational

culture, engendering cohesion, trust and communication and positively affecting

employees’ commitment and job satisfaction, enhances labour productivity and the

effectiveness of HRM practices when they are adopted, reducing indirect related costs at

once (Patel and Cardon, 2010).

Also governmental assistance and/or partnerships with a larger firm may help

SMEs to reduce costs and to leverage their resources (De Kok and Uhlaner, 2001). In

particular, SMEs associated with a large firm, which generally adopts more formal and

sophisticated HRM practices, may benefit from this knowledge. Moreover, for SMEs,

working closely with their partner either as a supplier, customer or franchiser, often means

gaining access to relevant HRM programs. Such a close contact may further result in a

better understanding of some of the benefits of HRM practices (De Kok and Uhlaner,

2001).

Pressures to implement formalized HRM practices in SMEs, however, may come

not only from the associated larger firms working with them, but also from their own

willingness to gain external legitimacy, enhance their image in society and consolidate

control (Harney and Dundon, 2006).

Among the external stakeholders’ expectations, government institutions’

28

requirements are the strictest ones influencing the degree of formalization of HRM

practices in SMEs, as they result in coercive prescriptions, which entail sanctions against

their non-execution. Therefore, in order to realize a full adoption and a complete

implementation of formal structures, procedures, and systems, it is relevant that SMEs’

owners show a high level of awareness about legislation and legal requirements on HRM

and employment matters, and that they are aware about the further recognition of the

impact on their business if they should not comply (Barrett and Mayson, 2007).

Nevertheless, generally, the application of sanctions is far from be automatic, rather it

needs employees file a grievance. This however is rarely done and, then, the government’s

expectations have only a minor influence on the adoption of formal HRM practices (De

Kok and Uhlaner, 2001).

Industry itself is considered an additional factor influencing HRM formalization in

SMEs, as well as the nature of its related labour market (Harney and Dundon, 2006).

Specifically, markets with a readily available supply of labour lead to limited investments

in formal HRM practices, especially in the recruitment ones, unless more skilled

employees are required due to other contextual variables. On the other hand, labour market

constraints often result in difficulties attracting qualified workers given the small pool from

which to choose, and so SMEs are more likely to rely on external agencies or more

formalized methods for recruitment purposes (Harney and Dundon, 2006). However, it is

expected a less impact of labour market factors in family SMEs, as part of their human

resources come from the family and, at most, they rely on external market when

fundamental skills are unavailable among family members.

3. Discussion and conclusions

29

Reviewing previous research is a doubtless useful approach in the context of family

SMEs. While the reviewing process helps to develop a reliable knowledge base and to

identify gaps in the existing research, theoretical frameworks, describing determinants of

firms’ managerial choices, can provide explanations for the distinctiveness of family SMEs

and for their unique behaviours.

This paper, however, shows that it is not possible to give a definitive answer on

how family SMEs adopt HRM practices, because both of the scarce number of

contributions and of the complex and even contradictory picture emerging from the

available ones. If on one hand, the existing research denies the widely shared belief that

family SMEs do not adopt formal HRM practices, on the other hand, it does not, however,

support the equally common opinion of complete personnel management’s informality.

Therefore, rather than a result of empirical research, such a widespread association seems

more likely an assumption based on smallness constraints and on the peculiar

characteristics of family SMEs, that make formal management complicated and create

unique challenges in HRM. Actually, the implementation of informal methods is generally

the case in family SMEs, but it’s not the rule.

Extant literature suggests that also family firms of smaller size have some form of

HRM policies, even if a personnel separate department or a HR manager is not present in

most of the cases. Nevertheless, the use of formal HRM practices was found to be

negatively related to family involvement in ownership and management, as comparative

studies between family and non-family SMEs confirm. Therefore, family SMEs show a

greater adoption of informal methods than their non-family counterparts, even referring to

different practices and sizes of the firms.

Research reports the word of mouth and the recommendations from staff as the

30

main recruitment practices in family SMEs, as well as the preference for advancing

insiders to fill managerial vacancies. Selection processes are mostly based on personal

judgements of the owner-managers, who rely on informal one-on-one interviews,

emphasizing employee’s ability to fit into existing norms of the organization rather than

paper qualifications. Formal application forms and entry requirements are found to be

rarely used, especially for family members. Similar favouritism is further evident in

compensation and appraisal procedures. It is argued that family members’ performance is

seldom assessed through formal appraisal systems and, generally, their remuneration

packages or pay bonus are not merit-based ones. Also training is described as

predominantly informal, not related to systematic analysis of employees’ needs, and

usually provided on-the-job by the owner-managers, through direct supervision and

correction of performance.

Besides consistency with predictions from resource based view theory and,

therefore, interpretation of the informal approach to HRM as result of the lack of financial,

organizational and human resource due to the small firm size, the previous findings can be

further attributed to the unique characteristics of family SMEs, and they can find

explanations also in the agency theory, institutional theory, and equity theory.

We point out that the family owner is driven not only by economic rationality, but,

as a Pater Familias concerned for the well-being of his relatives, he/she is steered by

altruistic feelings and sense of obligation and care toward family members, which

generally entail choices of relatives over non-family members in recruiting processes and

their employment despite no need for new workers or even if it’s wasteful for the business.

This clearly makes unnecessary sophisticated recruitment procedures and selection

practices, as well as compensation and appraisal systems based on formal performance

31

standards once family members entered the SME. Parental altruism, in fact, leads to

replace merit and equity norms with need and equality criteria in compensation decisions,

while the natural sharing of interests among members of the same family working together

means a lower need of formal performance controls and bureaucratic mechanisms, such as

incentive remuneration plans.

However, emotional factors and the presence of kinship ties are not the only

specific features of family SMEs. Family owners are also widely associated with a great

fear of losing control of their organizations and, consequently, with a negative attitude

toward tasks' delegation to others. To the extent that they are reluctant to dilute and put at

risk their power, these mainly employ and attract known individuals, more easy to control.

Consequently, this implies a less need to be seen as legitimate employers and, then, less

need to implement formal HRM practices. As well, since owners perceive development of

subordinates’ managerial competence as an additional threat for their power, they are also

less likely to promote extensive training and to adopt formal programs far from being

exclusively related to job.

However, as already said, some studies, even if few in number, show evidence of

exceptions. In particular, consistent with the company growth theory, formalization of

HRM practices was found to occur also in family SMEs with increases of sizes, referring

both to the business and family growth. Research reports a greater implementation of

formal selection, appraisal and compensations practices and a greater use of formal

training for non-family members within those among family SMEs with higher numbers of

employees and revenues. Thus, the adoption of formal HRM practices is positively related

to business growth, but not to increases in the number of family generations involved. We

point out the only exception in specific training programs for family members, instead

32

strongly associated to the growth of the family, that suggests the importance of distinction

between business-focused and family-focused practices when we refer to family SMEs.

Anyway, these results indicate that if family SMEs implement a growth-oriented strategy,

in some way, the delegation process becomes inevitable and the need to develop more

strategic methods emerge. As they often lack talented family members, family SMEs rely

on external labour markets for searching for employees with the appropriate skills and

knowledge to sustain business growth. Therefore, formal practices become necessary to

deal with unknown individuals, who can act opportunistically. However, comparative

studies between family and non-family SMEs stress that formalization takes place in

family SMEs to a less extent than their non-family counterparts, due to lower growth rates

and generally stunted development and delegation. In any case, the latter also entails a new

managerial structure, which in turn further influence the adoption of formal HRM

practices. Specifically, the more it is far from the family-centred model, the more the

formalization of HRM is likely to occur. The review provides evidence on how the

engagement of a non-family general manager means changes in HRM policies and

replacements with more formal practices, confirming again that family involvement and

emotional pressures generally act as a constrain to HRM formalization.

Apart from internal factors, it is expected that the adoption of more formal HRM

practices in family SMEs may depend also from external contingencies. Nevertheless,

research shows a significant gap in this topic. To the extent that smaller family SMEs, as

non-family ones, are often labour intensive, environmental conditions and legal

requirements doubtless impact their choices of HRM practices, but thus far, among studies

directed to identify potential external effects, none was specifically addressed to the family

businesses’ context. As well, the research on HRM formality in family SMEs, examining

33

only size, managerial structure and growth strategy, has left behind several other internal

variables. Strategy itself includes a broad range of possibilities besides growth orientation,

such as quality, cost minimization or differentiation, and each of these may result in

different combinations of HRM practices. Moreover, the conclusions of all these studies

are simply based on direct observations of one or few firms, rather than empirical analysis

on large samples, thus they cannot be consider as a perfectly solid ground for general

assumptions.

The limitations of the extant literature are well-evident. Besides an overall poor

number of contributions, findings are also contradictory. Further studies on HRM in family

SMEs are doubtless needed in order to have a more complete and clear picture of reality

and to better understand potential effectiveness of both informal and formal HRM practices

according to different contexts. In particular, future research should not only take account

of the above issues, that past explorations neglected, but should also leave behind

methodologies predominantly used thus far and overcome the weakness of existing studies'

samples.

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