Part Five

Enrichment Topics in Human Resource Management

Chapter 18
Managing Human Resources in Small and
Entrepreneurial Firms

Lecture Outline:
The Small Business Challenge
How Small Business Human Resource Management Is Different
Diversity Counts: Necessity and the Entrepreneur
Why HRM Is Important to Small Business
Using Internet and Government Tools to Support the HR Effort
Complying with Employment Laws
Employment Planning and Recruiting
Trends Shaping HR: Digital and Social Media
Employment Selection
Employment Training
Employment Appraisal and Compensation
Employment Safety and Health
Leveraging Small Size with Familiarity, Flexibility, Fairness and Informality
Simple, Informal Employee Selection Procedures
Improving Performance: HR Tools for Line Managers and Small Businesses
Flexibility in Training
Flexibility in Benefits and Rewards
Fairness and the Family Business
Using Professional Employer Organizations
How Do PEOs Work?
Why Use a PEO?
Caveats
Managing HR Systems, Procedures, and Paperwork
Introduction
Improving Performance: The Strategic Context
Basic Components of Manual HR Systems
Automating Individual HR Tasks
Human Resource Information Systems (HRIS)
Improved Transaction Processing
Online Self-Processing
Improved Reporting Capability
HR System Integration

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 Chapter 18: Managing Human Resources in Small and Entrepreneurial Firms 18-2

HRIS Vendors
Trending Shaping HR: Digital and Social Media
Chapter Review

Where Are We Now…

The main purpose of this chapter is to help you apply what you know about human resource
management to running a small business. The main topics we’ll address include the small
business challenge; using Internet and government tools to support the HR effort; leveraging
small size with familiarity, flexibility, fairness, and informality; using professional employer
organizations; and managing HR systems, procedures, and paperwork.

Interesting Issues:
City Garage is an expanding auto servicing company in Texas. One way they distinguish
themselves is with a strategy based on letting customers interact directly with City Garage’s
mechanics in what it calls its “open service area” – as they say, “We are all about customers.”
But fast growth and hiring sociable employees require effective hiring. We’ll see what they did.

Learning Objectives:
18-1: Explain why HRM is important to small businesses and how small business HRM is
different from that in large businesses.
18-2: Give four examples of how entrepreneurs can use Internet and government tools to
support the HR effort.
18-3: List five ways entrepreneurs can use their small size to improve their HR processes.
18-4: Discuss how you would choose and deal with a professional employee organization.
18-5: Describe how you would create a start-up human resource system for a new small
business.

Annotated Outline:
I. The Small Business Challenge
A. How Small Business Human Resource Management Is Different –
managing human resources in small firms is different for four main
reasons: size, priorities, informality, and the nature of the entrepreneur.
1. Size – the general guideline is that it’s not until a company reaches the
100-employee milestone that it can afford a human resource specialist.

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 Chapter 18: Managing Human Resources in Small and Entrepreneurial Firms 18-3

However, even five- to six-employee organizations must recruit,

select, train, compensate, and retain qualified staff.
2. Priorities – it is not just size but business realities of the entrepreneur’s
situation that drive them to focus their time on non-HR issues.
3. Informality – human resources management activities tend to be more
informal in smaller firms. Entrepreneurs must be able to react quickly
to changes in competitive conditions.
4. The Entrepreneur – entrepreneurs are people who create businesses
under risky conditions, and starting new businesses from scratch is
always risky. Entrepreneurs therefore need to be highly dedicated and
visionary.
5. Implications – the differences listed above result in potential
implications: 1) Small business owners run the risk that their relatively
rudimentary human resource practices will put them at a competitive
disadvantage. 2) There is a lack of specialized HR expertise as
compared with larger firms that have a full range of HR functions. 3)
The smaller firm is probably not adequately addressing potential
workplace litigation. Most small business owners are well aware of
the threat of employment-related litigation. 4) The small business
owner may not be fully complying with compensation regulations and
laws. 5) Duplication and paperwork leads to inefficiencies and data
entry errors. For small businesses, employee data often appears on
multiple human resource management forms.
B. Diversity Counts: Necessity and the Entrepreneur – more men than women start new
businesses, but according to one study, about 100 million women in 59 countries still
started new businesses in one recent year. Interestingly, most of the women who did
start businesses were not in the developed world. The most likely countries for women
to start businesses were in Latin America and sub-Saharan Africa. This may be because
in developed economies, women have more career options. In developing economies
such as Ghana, necessity infuses a confidence that drives more women to make it on
their own.
C. Why HRM Is Important to Small Business – entrepreneurs need all the
advantages they can get, and for them, effective human resource
management is a competitive necessity. Small firms with effective HR
practices perform better than those with less effective practices. For small
firms, effective human resource management is also required for getting and
keeping big customers.

II. Using Internet and Government Tools to Support the HR Effort

A. Complying with Employment Laws – small business owners spend much of their
time tackling issues related to employment laws. These owners can quickly find the
answers to many such questions online at federal agencies’ Web sites such as the
following:
1. The DOL – the U.S. Department of Labor’s First Step Employment Law
Advisor (www.DOL.gov/elaw/firststep); helps small employers determine
which laws apply to their business.

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 Chapter 18: Managing Human Resources in Small and Entrepreneurial Firms 18-4

2. The EEOC – the U.S. Equal Employment Opportunity Commission

(www.EEOC.gov/employers); guides small employers on all laws pertaining to
employment discrimination.
3. OSHA – the DOL’s Occupational Safety and Health Administration site
(www.OSHA.gov); supplies guidance for small business owners on practical
information including industry-specific safety and accident checklists.
B. Employment Planning and Recruiting – Internet resources such as the Department
of Labor O*NET (http://online.onetcenter.org) can make small business owners as
effective as their large competitors at writing job descriptions and building applicant
pools. Small business owners can use the online recruiting tools to post positions
on popular Internet job boards.
C. Trends Shaping HR: Digital and Social Media
D. Employment Selection – for the small business, one or two hiring mistakes could
wreak havoc. Some tests are so easy to use they are particularly good for smaller
firms. One example of such a test is the Wonderlic Personnel Test, which measures
general mental ability, and the Predictive Index, which measures work-related
personality traits, drives, and behaviors – in particular, dominance, extroversion,
patience, and blame avoidance.
E. Employment Training – although small companies can’t compete with the training
resources of larger organizations, Internet training can provide, at a relatively low
cost, the kinds of professional employee training that was formerly beyond most
small employers’ reach.
1. Private Vendors – the small business owner can tap hundreds of suppliers of
prepackaged training solutions.
2. The SBA – the federal government’s Small Business Administration
(www.SBA.gov) provides a virtual campus that offers online courses,
workshops, publications, and learning tools aimed toward supporting
entrepreneurs.
3. NAM – the National Association of Manufacturers (NAM) is the largest
industrial organization in the United States. NAM’s Virtual University
(www.namvu.com) helps employees maintain and upgrade their work skills and
continue their professional development.
F. Employment Appraisal and Compensation – even small employers now have easy
access to computerized and online appraisal and compensation services. Lack of
easy access to salary surveys once made it difficult and time consuming for smaller
businesses to fine tune their pay scales.
G. Employment Safety and Health – without human resource managers or safety
departments, small businesses often don’t know where to turn to for advice on
promoting employee safety. OSHA provides free on-site safety and health services
for small businesses. The OSHA Sharp program is a certification process through
which OSHA certifies that small employers have achieved commendable levels of
safety awareness.

III. Leveraging Small Size with Familiarity, Flexibility, Fairness, and Informality
A. Simple Informal Employee Selection Procedures – in general, small firms tend to
rely on more informal employee selection and recruitment practices, such as

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 Chapter 18: Managing Human Resources in Small and Entrepreneurial Firms 18-5

employee referrals and unstructured interviews, than do large firms. Work

sampling tests require candidates to perform actual samples of the job in question.
This can also be a very simple way to select employees.
B. Improving Performance: HR Tools for Line Managers and Small Businesses
C. Flexibility in Training – small companies typically take a more informal approach to
training and development. Smaller firms also tend to focus any management
development training on learning specific firm-related competencies.
D. Flexibility in Benefits and Rewards – The Family and Work Institute surveyed the
benefits practices of about 1,000 small and large companies. They found that large
firms offer more extensive benefit packages than small ones do. However, many
small firms seemed to overcome their bigger competitors by offering more
flexibility.
1. Simple Retirement Benefits – there are several ways for small firms to provide
retirement plans. The SIMPLE (savings incentive match plan for employees)
IRA plan is inexpensive and simple.
E. Fairness and the Family Business – most small businesses are family businesses,
in that the owner and one or more managers are family members. Being a
nonfamily employee here isn’t always easy. They sometimes feel like outsiders.
Some best practices to avoid partiality include setting ground rules, treating people
fairly, confront family issues, and erase privilege.

IV. Using Professional Employer Organizations

A. How Do PEO’s Work? – these vendors range from payroll companies to those that
handle all of an employer’s human resource management requirements. PEOs
basically are your “HR office,” but your employees still work for you.
B. Why Use a PEO? – employers turn to PEO’s for several reasons.
1. Lack of Specialized HR Support – up to 100 or so employees, small firms
typically have no dedicated HR managers, and even larger ones may have few
specialists.
2. Paperwork – The Small Business Administration estimates that small business
owners spend up to 25% of their time on personnel-related paperwork. This
includes background checks, benefits sign-ups, and so on.
3. Liability – to help ensure the small business fulfills its Title VII, OSHA,
COBRA, and the Fair Labor Standards Act responsibilities.
4. Benefits – insurance and benefits are often the PEO attraction. Obtaining
health and other insurance is often more challenging for smaller firms.
5. Performance – the professionalism that the PEO brings to recruiting,
screening, training, compensating, and maintaining employee safety and
welfare will hopefully translate into improved employee and business results.
C. Caveats – many employers view their human resource management processes as a
strategic advantage, and they are not inclined to turn over strategy-sensitive tasks
like screening and training to third-party firms.

V. Managing HR Systems, Procedures, and Paperwork

A. Introduction – recruiting and hiring an employee might require a help wanted
advertising listing, an employment application, an interviewing checklist, and the

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 Chapter 18: Managing Human Resources in Small and Entrepreneurial Firms 18-6

verification of education and immigration status. Much is required to run the human
resources management part of the business.
B. Improving Performance: The Strategic Context
C. Basic Components of Manual HR Systems – very small employers will probably
start with a manual human resource management system. This would include
obtaining and organizing a set of standardized personnel forms covering each
important aspect of HR.
1. Basic Forms – forms that should be considered include an application,
reference check, employee record, performance evaluation, vacation
request, corrective counseling, and exit interview. One simple way to
obtain the basic forms of a manual HR system is from Web sites
(www.hr.com/en/free_forms) or books, or CDs.
2. Other Forms – several direct-mail catalog companies offer a variety of HR
Materials. Firms such as HRdirect (www.hrdirect.com), or G. Neil
Company (www.gneil.com) can provide a comprehensive source of all
needed HR forms.
D. Automating Individual HR Tasks – as the small business grows, it becomes
impractical to rely on manual HR systems. It is as this point that most small- to
medium-sized firms should consider computerizing individual human resource
management tasks.
1. Packaged Systems – there are a variety of resources available. At the Web
site of the International Association for Human Resource Information
Management (www.ihrim.org), a categorical list of HR software vendors
can be found.
E. Human Resource Information Systems (HRIS) – the term information system
refers to the interrelated people, data, technology, and organizational procedures a
company uses to collect, process, store, and disseminate information.
F. Improved Transaction Processing – HRIS packages substitute powerful
computerized processing for a wide range of the firm’s HR transactions.
G. Online Self-Processing – HR information systems make it possible to make the
company’s employee part of the HRIS. For example, an organization can allow
employees to self-enroll in all desired benefit programs.
H. Improved Reporting Capability – the HRIS system integrates numerous individual
HR tasks, thereby increasing HR’s reporting capabilities.
I. HR System Integration – when the HRIS software components, such as payroll
record keeping, appraisals, and so forth, are integrated, the employer can
dramatically reengineer its HR function.
J. HRIS Vendors – the Web site for the International Association for Human
Resource Information Management (www.ihrim.org) provides a comprehensive
list of HR vendors.
K. Trends Shaping HR: Digital and Social Media

Chapter Review

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 Chapter 18: Managing Human Resources in Small and Entrepreneurial Firms 18-7

Chapter Section Summaries:

18-1: Many people reading this book will work for or own their own small business, so it’s
important to understand the small business challenge.
18-2: Being small, small businesses can particularly capitalize on freely available Internet and
government tools to support their HR efforts.
18-3: Small businesses need to capitalize on their strengths, and in this case, it means
capitalizing on familiarity, flexibility, and informality.
18-4: After reviewing all the challenges of managing human resources, many small business
owners turn to using professional employer organizations.
18-5: Small business managers need to understand how their HR systems, procedures, and
paperwork will evolve.

Discussion Questions:
18-1: How and why is HR in small businesses different than that in large firms?

Human resource management activities tend to be more informal in smaller firms. For
example, one study analyzed training practices in about 900 family and non-family small
companies. Training tended to be informal, with an emphasis, for instance, on methods
like coworker and supervisor on-the-job training. Such informality isn’t just due to lack
of expertise and resources; it is also partly a matter of survival. Entrepreneurs must be
able to react quickly to changes in competitive conditions.

18-2: Explain why HRM is important to small businesses.

This item can be assigned as a Discussion Question in MyManagementLab. Student

responses will vary.

18-3: Explain and give at least five examples of ways entrepreneurs can use small size—
familiarity, flexibility, and informality—to improve their HR processes.

Small business owners spend much of their time tackling legal issues. These small
business owners can quickly find answers to many such questions online at the following:
The Department of Labor or DOL.gov, the EEOC or EEOC.gov, the Occupational Safety
and Health Administration or OSHA.gov, and the Society of Human Resource
Management or SHRM.org.

18-4: Describe with examples how you would create a startup, paper-based human
resource system for a new small business.

This item can be assigned as a Discussion Question in MyManagementLab. Student

responses will vary.

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 Chapter 18: Managing Human Resources in Small and Entrepreneurial Firms 18-8

Individual and Group Activities:

18-5: Form teams of five or six persons, each with at least one person who owns or has
worked for a small business. Based on their experiences, make a list of the
“ inadequate-HR risks” the business endured, in terms of competitive disadvantage,
lack of specialized HR expertise, workplace litigation, compensation laws
compliance, and paperwork/data-entry errors.

Lack of effective and sophisticated recruitment strategies, additional legal issues due to
lack of HR expertise, lack of training which may lead to employment discrimination or
sexual harassment claims, small business may not comply with complex regulations and
laws, lack of an HRIS system may lead to more timely processing of data as well as more
manual errors.

18-6: You own a small business, and you are confused about which of your employees is
eligible for overtime pay. The employees in question include your secretary, two
accounting clerks, one engineer, and two inside salespeople. Individually or in
groups of four or five students, use the DOL’s Overtime Security Advisor and
DOL’s Calculator to determine who gets overtime pay.

The secretary and two accounting clerks should be classified as non-exempt, and the
engineer and two inside salespeople should be classified as exempt.

18-7: You have about 32 employees working in your factory. Working individually or in
teams of four or five students, find and create a list of five online sources you could
use to provide training to them, at no cost to you or to them.

Here are 5 to start: www.DOL.gov, www.strategichr.com, www.ASTD.org,

www.legalworkplace.com, and www.articlebased.com.

18-8: Appendices A and B at the end of this book list the knowledge someone studying for
the HRCI (Appendix A) or SHRM (Appendix B) certification exam needs to have in
each area of human resource management (such as in Strategic Management and
Workforce Planning). In groups of several students, do four things: (1) review
Appendix A and/or B; (2) identify the material in this chapter that relates to the
Appendix A and/or B required knowledge lists; (3) write four multiple-choice exam
questions on this material that you believe would be suitable for inclusion in the
HRCI exam; and (4) if time permits, have someone from your team post your
team’s questions in front of the class, so that students in all teams can answer the
exam questions created by the other teams.

The material from this chapter that is applicable to the certification exams would include:
the HR challenges of small businesses, how small organizational differences affect HRM,
how to implement a small business, HR system, staffing the small organization, and
training and maintaining employees of small businesses.

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 Chapter 18: Managing Human Resources in Small and Entrepreneurial Firms 18-9

Experiential Exercise: Building an HRIS

Purpose: The purpose of this exercise is to give you practice in creating a human resource
management system (HRIS).

Required Understanding: You should be fully acquainted with the material in this chapter.

How to Set up the Exercise/Instructions: Divide the class into teams of several students. Each
team will need access to the Internet. Assume that the owners of a small business come to you
with the following problem. They have a company with less than 40 employees. They have been
taking care of all HR paperwork informally, mostly on slips of paper and with memos. They
want you to supply them with a human resource management information system – how
computerized it is will be up to you, but they can only afford a budget of $5,000 upfront (not
counting your consulting), and then about $500 per year for maintenance. You know from your
HR training that there are various sources of paper-based and online systems. Write a two-page
proposal telling them exactly what your team would suggest, based on its accumulated existing
knowledge, and from online research.

Application Case: Netflix Breaks the Rules

In many respects, the Netflix HR strategy seems like a dream come true for small businesses.
You don’t need a pay plan; instead, you just update each person’s pay every few months based
on market surveys. You offer no training and development. And you don’t track vacation time,
more or less. If someone’s not doing well, you just pay him or her to leave, with no hassles.
Netflix seems to have hit upon its own version of “Netflix High-Performance Work Practices.”
Given that, answer the following questions (please be specific).

18-9: What (if anything) is it about Netflix that makes its HR practices work for it?

Student answers will vary and may include a discussion of the company’s culture. The
culture is such that people are treated as adults and are able to “police themselves.”
Everyone understands that not performing up to the company’s expectations will result in
termination. Frequent pay raises and the constant updating to stay competitive with the
market helps to keep motivation high.

18-10: Would you suggest using similar practices in other businesses, such as a new
restaurant? Why?

Students’ answers will vary, but look for their arguments to be grounded in logical
arguments to support their viewpoint.

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 Chapter 18: Managing Human Resources in Small and Entrepreneurial Firms 18-10

18-11: List the criteria you would use for deciding whether another company is right for
Netflix-type HR practices.

Criteria may include looking at the following areas: the current compensation system
(Does the company pay at or above market wages?), the strength of the corporate ethical
culture (Companies who are to be successful at this type of HR system must be highly
ethical and as they must, to a certain degree, be honest and open about the work they are
doing.), and the organization needs to be one where individuals can work independently
of one another so to maintain workflow and quality while dealing with such extreme
flexibility in the scheduling.

18-12: What argument would you make in response to the following: “Netflix just lucked
out; they would have done even better with conventional HR practices?”

Students’ answers will vary. Either side is debatable, so look for students to defend their
arguments with logical arguments from the book.

Continuing Case: Carter Cleaning Company – Cleaning in Challenging Times

18-13: Assume that we don’t want to terminate any of our employees. What work-
scheduling related changes could we make that would reduce our payrolls by, say,
20% per week but still keep all our employees on board?

One of the benefits of a small employer is the ability to adapt to changing market
conditions. Therefore, flexible work scheduling could be easily implemented to cover all
required costs while keeping staffing costs at a minimum. Even offering the staff the
option to take time without pay could prove beneficial to the employer while maintaining
current staffing levels.

18-14: We are currently handling most of our personnel-related activities, such as sign-ons,
benefits administration, and appraisals, manually. What specific suggestions would
you have for us in terms of using software systems to automate our HR processes?

A packaged system would probably prove cost effective for this size employer. These
types of systems offer programs for controlling attendance, maintaining employee
records, writing job descriptions, and other HR-related requirements.

18-15: Suggest at least five free Internet-based sources we could turn to for helping us to
lower our total employment costs.

The International Association for Human Resource Information Management

(www.ihrim.org), the Small Business Administration (www.sba.gov), the U.S.
Department of Labor’s – First Step Law Advisor (www.dol.gov/elaws/firstep), OSHA’s
Small Business Handbook (www.osha.gov), and the National Association of
Manufacturers (www.namvu.com).

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 Chapter 18: Managing Human Resources in Small and Entrepreneurial Firms 18-11

Hotel Paris: Improving Performance at the Hotel Paris – The New HRIS

18-16: Using any benchmark data that you can find, including information from this
textbook, what are some benchmark metrics that Lisa could be using to assess the
efficiency of her human resource management operations? To what extent does the
Hotel Paris’s quality service orientation enter into how Lisa’s metrics should
compare?

Lisa should consider looking at benchmarking data on the following HR activities:

benefits, work schedules/locations, compensation options, workforce demographics,
training, development, and technology. Lisa should review carefully the Hotel Paris’s
quality service orientation as it compares to Lisa’s metrics to determine the cost
effectiveness of each activity.

18-17: Throughout this textbook, we’ve discussed various specific examples of how human
resource management departments have been reducing the cost of delivering their
services. Keeping in mind the Hotel Paris’s service quality orientation, please list
and explain with examples how Lisa Cruz could use at least five of these.

Information technology could greatly help Lisa reduce the human resource
administration’s current costs; in addition, Lisa could look at the resources available from
the Small Business Administration as well as the Department of Labor. Also, Lisa could
consider outsourcing some of the more costly HR activities to a PEO.

18-18: Focusing only on human resource information systems for a moment, which systems
would you suggest Lisa consider recommending for the Hotel Paris? Why?

A packaged program would prove the most cost effective for the Hotel Paris. Online self-
processing should prove especially beneficial to Lisa in order to help improve efficiency,
accuracy, and cost reductions.

18-19: Explain with detailed examples how Lisa can use free online and governmental
sources to accomplish at least part of what you propose in your previous answers.

Lisa could review the resources offered from the Small Business Administration as well
as the Department of Labor.

18-20: Give three examples of fee-based online tools you suggest Lisa use.

Transaction-processing systems, management information systems, and executive

support systems

18-21: Do you suggest Lisa use a PEO? Why?

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 Chapter 18: Managing Human Resources in Small and Entrepreneurial Firms 18-12

Lisa should consider the use of a PEO for at least some of her HR programs. For
example, payroll and benefits administration could prove very cost effective for Lisa
since her HR costs are currently running 30% higher than comparable organizations.
Very often PEO’s can offer comprehensive services at competitive fees.

My Management Lab

Students can find the following assisted-graded writing questions at mymanagementlab.com.

Answers to these questions are graded against rubrics in the MyLab.

18-22: Explain and give at least four examples of how entrepreneurs can use Internet and
government tools to support the HR effort.

18-23: This chapter explained that to compete with larger employers, the small business owner
should capitalize on familiarity, flexibility, and informality. What does this mean and
how as a small business owner would you do that?

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