Enhancing Return on HR Investment

[We’re pleased to welcome back Pankaj M. Madhani, Associate Dean and Professor of ICFAI Business School (IBS). Dr. Madhani is the author of “Enhancing Return on HR Investment: Risk Management With Real Options Approach” which has been published in Compensation and Benefits Review and is currently free to read for a limited time. From Dr. Madhani:]

CBR_42_1_72ppiRGB_powerpointWhat motivated you to pursue this research?

For any organization, human resources (HR) are assets that can provide value and competitive advantage; however, such assets have associated uncertainties and risks. There is growing recognition that one of the key risks in a business is related to management of HR. As HR inherently involves a level of uncertainty, and as risk management’s main focus is uncertainty, forging the two fields of risk management and HR is important. Returns on HR investment may not remain stable over time for organizations due to changes in business conditions. The ability of the organizations to operate flexibly in dynamically changing business conditions is crucial on the long run. The “real options” approach enables organizations to evaluate investment opportunities of HR in uncertain environments and highlights how these investments create value through future choices (i.e., options). Research applies this logic to analyze the uncertainties associated with HR assets in organizations and discuss how organizations manage these uncertainties through HR “options,” which are capabilities generated by some HRM practices and their combinations.

In what ways is your research innovative, and how do you think it will impact the field?

The research emphasizes role of HR options in hedging HR related risks and uncertainties and provides risk management guidelines to practicing managers for enhancing return on HR investment. Extending the concept of real options, the research underlines certain HRM practices as creating HR options in terms of reducing uncertainties related to returns, volume and combinations and costs. The value of HR options lies in allowing the organizations to respond proactively to the uncertainties of human assets. HR options enable the organizations to develop and deploy human capital in order to limit downside risk caused by environmental uncertainty and create opportunities for greater returns in the future. In this research, various types of options, such as switching options, growth options, learning options, timing options, scaling options and turnover and productivity HR options are developed. Deployment of such HR options creates a strategic organizational capability to adapt to future contingent events and flexibly manage risks and uncertainties associated with investments in HR. Research also provides various real-life illustrations of such successful deployment of HR options in organizations.

What advice would you give to new scholars and incoming researchers in this particular field of study?

HR options may manage more than one type of risks and have synergistic effects when they act in “bundles” of multiple interacting options. However, when there is no synergy among various HR options related to different types of uncertainty, such as uncertainty of returns, volume and combinations and costs, it results in suboptimal performance. In this scenario, hedging one type of uncertainty will increase other related uncertainties (e.g., managing uncertainty of volume and combinations may lead to increased uncertainty of costs). Thus, there is need to study interactions and interdependency of various HR options to mitigate overall risks, quantify numerically each of the investment options and  investigate the linkage between deployment of HR options and the organization’s operational and financial performance.

 

Pankaj M. Madhani earned bachelor’s degrees in chemical engineering and law, a master’s degree in business administration from Northern Illinois University, a master’s degree in computer science from Illinois Institute of Technology in Chicago, and a PhD in strategic management from CEPT University. He has more than 30 years of corporate and academic experience in India and the United States. During his tenure in the corporate sector, he was recognized with the Outstanding Young Managers Award. He is now working as an associate dean and professor at ICFAI Business School (IBS) where he received the Best Teacher Award from the IBS Alumni Federation. He is also the recipient of the Best Mentor Award. He has published various management books and more than 300 book chapters and research articles in several refereed journals. He has received the Best Research Paper Award at the IMCON-2016 International Management Convention. He is a frequent contributor to Compensation & Benefits Review and has published more than 20 articles on sales compensation. His main research interests include salesforce compensation, corporate governance and business strategy. He is also editor of The IUP Journal of Corporate Governance.

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