AMJ1997 Alternative Approaches to the Employee-Organization Relationship

Alternative Approaches to the Employee-Organization Relationship: Does Investment in Employees Pay off? Author(s): Anne S. Tsui, Jone L. Pearce, Lyman W. Porter, Angela M. Tripoli Source: The Academy of Management Journal, Vol. 40, No. 5 (Oct., 1997), pp. 1089-1121 Published by: Academy of Management Stable URL: http://www.jstor.org/stable/256928 Accessed: 06/04/2009 21:01 Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at http://www.jstor.org/page/info/about/policies/terms.jsp. JSTOR's Terms and Conditions of Use provides, in part, that unless you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use. Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at http://www.jstor.org/action/showPublisher?publisherCode=aom. 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TRIPOLI University College Dublin This article describes four approaches to the employee-organization relationship, as defined from the employer's perspective. An empirical study of employees from ten companies found support for the basic hypothesis that employee responses differ under the four types of rela- tionship. In general, employees performed better on core tasks, dem- onstrated more citizenship behavior, and expressed a higher level of affective commitment to an employer when they worked in an overin- vestment (by the employer) or mutual investment relationship than when they worked in a quasi-spot-contract or underinvestment rela- tionship. These results were obtained even after we controlled for sev- eral other variables that could affect employee performance and atti- tudes. "Increasing international competition and the rapid pace of technologi- cal change are favoring organizations that are lean, fast, and flexible" (Miles, 1989: 9). And Osterman observed that "in recent years, perhaps for the first time since the Depression, there are widespread indications that internal labor market structures are changing" (1988: 68). It is clear that external factors are forcing firms to alter their internal administrative and manage- ment structures. Specific changes include large-scale reduction of manage- rial and professional jobs (Buono & Bowditch, 1989), flattening of organiza- tional levels (Harrison & Bluestone, 1988), externalization of work (Pfeffer & Baron, 1988), and development of new industrial relations systems (Arthur, 1992), management structures (Lawler, 1986, 1988), and employee gover- nance systems (Mahoney & Watson, 1993). This article was accepted for publication by Angelo DeNisi, the previous editor of this journal. The first author was also on the faculty of the University of California, Irvine, when the research was conducted. The authors wish to thank Brenda Callahan, Terri Egan, Jennifer Hite, and Edward Hernandez for their valuable assistance on the study, and Lynn Shore, John Slocum, and Hal Gregersen for their helpful comments on an earlier version of the article. The research was funded by a National Science Foundation grant, number SES-892123. 1089 Academy of Management Journal These types of changes have in turn spawned a variety of employment relationships (Arthur, 1992; Atchison, 1991; Lawler, 1988; Osterman, 1988; Walton, 1985) designed to maximize organizational flexibility while at the same time maintaining or increasing employee performance. Utilizing the ideas of inducement-contribution (Barnard, 1938; March & Simon, 1958) and extending the framework of Tsui, Pearce, Porter, and Hite (1995), we propose four basic approaches to the employment relationship that an employer can take. The first two approaches are intended to create distinct types of flex- ibility for an organization. One of these approaches is based on a pure eco- nomic exchange model and attempts to create a marketlike flexibility so that the employer is free to hire and fire workers. The other is based on a com- bined economic and social exchange model and attempts to create a clanlike flexibility by developing and encouraging employees to adopt permeable and expandable work roles. In exchange, the employer offers some degree of employment security to the employees. These two approaches are similar to employment relationships that have been described recently by a variety of authors (e.g., Arthur, 1992; Lawler, 1988; Mahoney & Watson, 1993; Oster- man, 1988; Tsui et al., 1995). These two contrasting employee-organization-relationship approaches represent prototypes of balanced exchanges. They are balanced in that the obligations of each party are either narrow and specified or broad and open ended. In practice, however, many organizations use mixed, or relatively "unbalanced," approaches that include components of both of the two bal- anced prototypes. In one of these unbalanced approaches, the employer desires flexible and expandable work behavior by employees but also at- tempts to retain its flexibility to hire and fire summarily. In the other, the employer provides relatively high employment security to employees, but expects only narrowly specified role behavior in exchange. Is the desired flexibility actually being realized through these ap- proaches? Taking a broader look at the impact of these approaches, in what ways are they affecting the nature and quality of employee performance and the attitudes employees hold toward the organizations? The current study was designed to answer these questions. To do this, we collected data from a large sample of employees in ten companies operating in competitive industries. The data were analyzed at the job and individual levels rather than at the firm level, on the assumption that employers may adopt different employment approaches for different jobs within a firm in order to achieve maximum flexibility for the firm as a whole (Tsui et al., 1995). We related each employer-defined employment approach used for employees in a par- ticular job within a company to the performance and attitudes of employees in that job. EMPLOYEE-ORGANIZATION RELATIONSHIP: A CONCEPTUAL ANALYSIS Tsui and colleagues (1995) used the term employee-organization- relationship strategy to capture the employer's perspective on the employ- October 1090 Tsui, Pearce, Porter, & Tripoli ment relationship. An employee-organization-relationship strategy includes the employer's expectations about specific contributions that it desires from employees and the inducements that it uses to effect the desired contribu- tions. The employee-organization relationship is different from a psycho- logical contract (Levinson, Price, Munden, Mandl, & Solley, 1962; Kotter, 1973; Rousseau, 1995; Rousseau & Parks, 1993), which includes expecta- tions about the nature of the exchange held by both employer and employee. Although employees' influence on and expectations of the relationship are important, we chose to focus on the employer's perspective in this study because (1) this is where most of the changes have been observed and (2) although some negotiations do occur, it is usually the employer who defines the bulk of the terms or content of employment contracts. The primary conceptual foundation for our employee-organization- relationship framework is exchange theory or, more appropriately, exchange theories (cf. Blau, 1964; Ekeh, 1979; Pearce & Peters, 1985). Although the objectives and approaches of different exchange theories vary, they all share the assumption that a focus on exchange can provide insights into social processes. In discussing employer-defined employee-organization relation- ships, we focus on the "system" equity idea that Goodman (1974) proposed, in contrast to "internal" or "external" equity, concepts in which the refer- ents for comparison are, respectively, employees inside or outside a given organization. According to Goodman (1974), the referent for system equity is the employing organization itself. Thus, our focus is on the degree of balance in the exchange between an employee and an organization. Further, we use "balance" rather than "equity" because equity implies a perception by em- ployees. Our focus is on the relative balance between the inducements of- fered by an employer and the contributions expected of its employees, as defined from the employer's perspective. Below, we describe the four different employer-defined employee- organization-relationship approaches, two involving largely balanced ex- changes that Tsui and colleagues (1995) described in detail and that re- semble models proposed by several other authors (e.g., Arthur, 1992; Lawler, 1988; Mahoney & Watson, 1993; Osterman, 1988), and two involving some form of imbalance. We offer several hypotheses on the relationship between the four approaches and employees' performance and attitudinal responses. Balanced Employee-Organization-Relationship Approaches Tsui and colleagues (1995), in a review of the employment relationship literature, identified two types of employee-organization relationship that involve relatively balanced exchanges between employee and employer. One type resembles a pure economic exchange. The employer offers short- term, purely economic inducements in exchange for well-specified contri- butions by the employee. A classic example of this type of employment relationship is that between a brokerage firm and a stockbroker. Here, the employee-organization relationship is defined in terms of specified activi- ties for a set compensation. Neither party expects contributions or induce- 1997 1091 Academy of Management Journal ments beyond those specified. For example, it is not expected that stockbro- kers will help other employees in the company or be concerned about the firm's overall performance. Similarly, the employer's obligation to the em- ployee is confined to rewards that are defined largely in monetary terms. Neither party-especially the employer-has an obligation to maintain a long-term relationship. The balance is in the fact that the exchange is rela- tively short-term and closed-ended for both parties; rather than in the eco- nomic value of what is being exchanged. We use the term quasi spot contract to describe this highly circumscribed employee-organization-relationship approach. Analogous to this prototype are the industrial model described by Os- terman (1988) and the cost control strategy described by Walton (1985). As Osterman explained, "In this model work is organized into a series of tightly defined jobs with clear work rules and responsibilities attached to each classification. Wages are attached to jobs" (1988: 64). Similarly, in the cost control strategy, "Employee attention is limited to performing the individual job" (Walton, 1985: 81). Earlier conceptual equivalents of this employee- organization-relationship approach include the utilitarian involvement idea (Etzioni, 1961) and the market mechanism (Ouchi, 1980). As several authors have suggested (e.g., Davis-Blake & Uzzi, 1993; Os- terman, 1988; Tsui et al., 1995), the quasi-spot-contract type of employee- organization relationship may be more appropriate for some jobs than for others. It may be especially appropriate where a performance contribution can be clearly defined and measured. Elsewhere, however, a spot contract may be highly inappropriate, and a more open-ended relationship may be desired. For example, Davis-Blake and Uzzi (1993) observed that jobs that are high in informational and technical complexity are less likely to be externalized (with contractors substituted for employees) than are other jobs. In the context of a high degree of environmental uncertainty and rapid change, it is difficult for an employer to know in advance what types of problems it will encounter in the future. Therefore, at least for job complex- ity and external adaptation reasons, the employer may find it advantageous to leave some obligations unspecified and to treat the employment relation- ship as a combination of economic and social exchange rather than as a purely economic exchange. A basic and crucial distinction between economic and social exchange is that the latter entails unspecified, broad, and open-ended obligations on the part of both parties (Blau, 1986). In a social exchange relationship, the inducements an employer offers go beyond short-term monetary rewards. They include an extended consideration of an employee's well-being as well as an investment in the employee's career within the firm. In exchange, the employee's obligations and contributions include working on job assign- ments that fall outside of prior agreements or expertise, assisting junior colleagues, accepting job transfers when requested by the employer to do so, and, in general being willing to consider the unit's or the organization's interests as important as core job duties. The employee is also willing to 1092 October Tsui, Pearce, Porter, & Tripoli learn firm-specific skills that are not readily transferable to other employers because he or she trusts that such investments will be reciprocated over the long term. This is a balanced exchange relationship because it involves some degree of open-ended and long-term investment in each other by both the employee and the employer. We refer to this as the mutual investment em- ployee-organization-relationship approach. Analogous to this type of employee-organization relationship is the sala- ried model described by Osterman (1988), the high involvement approach advocated by Lawler (1986, 1988), the commitment strategy of Walton (1985), and the employee commitment system described by Arthur (1992). There are several earlier conceptual equivalents of this approach, including the normative involvement idea advanced by Etzioni (1961) and the employ- ment relationship found in the clan (Ouchi, 1980), among others. Unbalanced Employee-Organization-Relationship Approaches The two types of employee-organization relationship just described re- flect balanced exchanges in which the obligations of each party are matched (i.e., a closed-ended and short-term economic exchange, and an economic and social exchange that is open-ended and long-term). It is possible, how- ever, for two unbalanced employee-organization-relationship approaches to exist. In some employment relationships, the employee is expected to un- dertake broad and open-ended obligations, while the employer reciprocates with short-term and specified monetary rewards, with no commitment to a long-term relationship or investment in the employee's training or career. We use the term underinvestment to describe such an unbalanced relation- ship. In a contrasting type of unbalanced employee-organization relation- ship, the employee performs only a well-specified set of job-focused activi- ties, but the employer offers open-ended and broad-ranging rewards, includ- ing training and a commitment to provide the employee with career opportunities. We use the term overinvestment to refer to this second un- balanced employee-organization relationship. The employee-organization relationships of many employers in com- petitive industries can be characterized as the underinvestment type because these employers desire full commitment from employees but at the same time want the flexibility to lay off employees virtually at will. This approach appears to be more favorable to employers than to employees. Other organ- izations adopt an approach that is seemingly more favorable to employees. Employees in organizations bound by trade union contracts, and some gov- ernment bureaucracies, are managed by what may be considered the over- investment approach. Some employees in these organizations have enjoyed relatively high employment security and have received considerable train- ing investments from the employers without necessarily being expected to make contributions that go beyond their immediate jobs. 1997 1093 Academy of Management Journal Employee Performance Responses to Different Employer-Defined Employee-Organization Relationships In the quasi spot contract, the employee's attention is directed to a set of closed-ended tasks and toward specified rewards that are fully contingent upon satisfactory performance of those tasks. The employee is not expected to, and in fact may be discouraged from, engaging in activities beyond those specified so that his or her undivided attention can be given to the core job. Thus, we would anticipate specified task performance to be particularly high under this employee-organization relationship. Here, a critical assumption is that the employer can define the core tasks either in terms of activities or outcome. However, we do not predict similar high performance for employees in the overinvestment employee-organization relationship, where they are also expected to devote their attention primarily or solely to core job duties. Under this approach, the situation is similar to that of the "overpayment" condition described by Adams (1965). Even though the organization's in- vestment is higher than it is in the quasi spot contract, recipients tend to rationalize the overpayment, and thus the favorable exchange does not serve as an incentive to perform exceptionally well. In contrast, in the underin- vestment relationship, employees are not likely to perform their core tasks well for two other reasons. First, they are expected to devote some of their attention to open-ended task activities, and second, there is no expectation of employment security. Therefore, they may not perform well because they get little payoff for doing so or because they want to restore some level of psychological equity to the relationship (Adams, 1965). Finally, in the mu- tual investment employee-organization relationship, employees' attention is divided between performance on the core job and activities that are benefi- cial to the larger unit to which they belong. Given this broad involvement in the organization, these employees' contributions on basic tasks should, by definition, be lower than those of employees under the quasi-spot-contract employee-organization relationship. However, because the employer's per- formance expectation is high, employees under the mutual investment ap- proach should perform better on core tasks than employees under the over- investment approach. Drawing on the above rationale, we propose the following hypothesis on the relationship between the four employee-organization-relationship ap- proaches and employees' performance on basic tasks: Hypothesis 1. Employees' performance on core tasks will