Level of formalization of human resource management in small and medium enterprises in India

Abstract

In this article, the current state of management of human resources in Small and Medium Enterprises (SMEs) in India is explored. The owner-managers play important roles in managing human resources in SMEs. The direct involvement of the owner manager also leads to ad hoc and informal HR practices. However, formal HRM systems can help increase performance. This study specifi cally examines the level of formalisation of human resource management in small and medium enterprises in India. Formalisation is defi ned as the extent to which regular and written-up procedures exists, a stated policy is in place, and a specialist designs and executes the HR systems. Data were collected using a questionnaire from 89 small enterprises and 54 medium enterprises on the level of formalisation of twelve HR functions. It was found that the level of formalisation of HRM systems in SMEs was low and owner-managers played a central role in the HR functions of their enterprises. Compared to small enterprises, the level of formalisation was found to be higher for medium enterprises. The level of formalisation increased with increase in employee strength. An inverse relationship between the extent of involvement of the ownermanager in managing human resources and the existence of a formal policy for HRM was evidenced. Implications of decisions by owner-managers to keep HR functions informal or formal in small and medium enterprises are discussed. It is necessary for SMEs to fi nd ways in which formal and fl exible systems can co-exist.