1. Managing Human Resources in Small and Entrepreneurial Firms#
Managing Human Resources in Small and Entrepreneurial Firms
Most people work for small businesses or create their own new small businesses, and such businesses have special human resource management needs. 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.
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2. Learning Objectives
Explain why HRM is important to small businesses and how small business HRM is different from that in large businesses.
Give four examples of how entrepreneurs can use Internet and government tools to support the HR effort.
At the conclusion of this chapter, you will be able to:
Explain why HRM is important to small businesses and how small business HRM is different from that in large businesses.
Give four examples of how entrepreneurs can use Internet and government tools to support the HR effort.
Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall

3. Learning Objectives
List five ways entrepreneurs can use their small size to improve their HR processes.
Discuss how you would choose and deal with a professional employee organization.
Describe how you would create a start-up human resource system for a new small business.
In addition, you will be able to:
List five ways entrepreneurs can use their small size to improve their HR processes.
Discuss how you would choose and deal with a professional employee organization.
Describe how you would create a start-up human resource system for a new small business.
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4. Why HRM is Important to Small Businesses and How Small Business HRM is Different from that in Large Businesses
More than half the people working in the United Sates—about 68 million out of 118 million workers—work for small firms. Small businesses as a group account for most of the 600,000 or so new businesses created every year, as well as for most business growth.
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5. The Small Business Challenge
How small business HRM is different
Size
Priorities
Informality
The entrepreneur
Implications
Why HRM is important to small businesses
Managing human resources in small firms is different for four main reasons: size, priorities, informality, and the nature of the entrepreneur.
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. However, even five- to six-employee organizations must recruit, select, train, compensate, and retain qualified staff.
Priorities
It is not just size but the realities of the entrepreneur’s situation that drive them to focus their time on non-HR issues. Entrepreneurs must wear many hats and be able to change them quickly. Their focus is on helping the business achieve its growth and productivity goals leaving little time for personnel matters.
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.
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.
Implications
The differences listed above result in potential implications.
Owners may be at a competitive disadvantage due to having rudimentary HR practices.
There is no specialized HR expertise on board.
Workplace litigation may be around the next corner but the owners may not realize it.
Compensation regulations and laws may not be adequately addressed (if at all).
Duplication and paperwork leads to inefficiencies and data entry errors. For small businesses, employee data often appears on multiple HR management forms.
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.
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6. Review Size Priorities Informality The entrepreneur Importance
So far, we have covered the advantages of size of a firm in that small businesses does not necessarily need HR expertise until it reaches the critical mass of about 100 employees. Nonetheless, the small firm still needs to recruit, hire, train, compensate, supervise, and train qualified employees. Such a firm also needs an awareness of basic issues of fairness in terms of compensation, equal opportunity employment, and other compliance issues.
We also noted that entrepreneurs are generally focused on running their business leaving little time for HR-related activities. However, size makes a difference in that small businesses can be more athletic in their business dealings as well as attending to their HR needs.
In general, we may observe that while small businesses can perform productively and move quickly on competitive issues, HR needs and requirements must receive attention.
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7. Four Examples of How Entrepreneurs Can Use Internet and Government Tools to Support the HR Effort
No small business owner needs to cede the advantage to big competitors when it comes to human resource management. One can level the terrain by using Internet-based HR resources, including the free resources of the U.S. government. We’ll next look at how small firms can do this.
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8. Using Internet and Government Tools to Support the HR Effort
Complying with employment laws
DOL
EEOC
OSHA
Employment planning and recruiting
Web-based recruiting
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:
The U.S. Department of Labor’s First Step Employment Law Advisor ( helps small employers determine which laws apply to their business.
The U.S. Equal Employment Opportunity Commission ( guides small employers on all laws pertaining to employment discrimination.
The DOL’s Occupational Safety and Health Administration site ( supplies guidance for small business owners.
Internet resources can make small business owners almost 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 or popular Internet job boards.
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9. Using Internet and Government Tools to Support the HR Effort
Selection
Complying with the law
Training
Private vendors
The SBA and NAM
Appraisal and compensation
Safety and health
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 Predictive Index, which measures work-related personality traits, drives, and behaviors.
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.
Particularly when using tests at work, the employer must comply with equal employment laws. Many test providers will assist the employer in setting up a testing procedure. For example, as we noted, Wonderlic will review your job descriptions as part of its process.
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. There are hundreds (perhaps thousands) of private vendors that may be used. The federal government’s Small Business Administration provides a virtual campus that offers online courses, workshops, publications, and learning tools aimed toward supporting entrepreneurs. The National Association of Manufacturers (NAM) is the largest industrial organization in the United States. NAM’s Virtual University helps employees maintain and upgrade their work skills and continue their professional development.
Even small employers now have easy access to computerized and online appraisal and compensation services.
Without HR managers or safety departments, small businesses often don’t know where to turn for advice on promoting employee safety. OSHA provides free on-site safety and health services for small businesses.
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10. Review Employment laws Planning and recruiting Selection Training
Appraisal and compensation
Safety and health
Fortunately for busy entrepreneurs, organizations such as OSHA, NAM, and the SBA provide services and information that help guide emerging firms properly when it comes to laws and planning tools. Recruiting online is easier than ever and even small firms can compete effectively with larger ones.
Selection services and training programs can be provided by outside vendors that are easy to access via the Internet. Appraisal and compensation systems are also available as are tips and techniques to help the small business owner.
Finally, safety and health-related information for small businesses is available free from organizations such as OSHA.
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11. Five Ways Entrepreneurs Can Use their Small Size to Improve their HR Processes
Because small businesses need to capitalize on their strengths, they should capitalize on their smallness when dealing with employees. Smallness should translate into personal familiarity with each employee’s strengths, needs, and family situation. And it should translate into being flexible and informal in the human resource management policies and practices the company follows.
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12. Leveraging Small Size:
Familiarity, Flexibility, Fairness, Informality, and HRM
Simple, informal selection
Streamlined interviews
Preparing
Specific factors to probe
Conducting the interview
Matching the candidate to the job
In general, small firms tend to rely on more informal employee selection and recruitment practices, such as employee referrals and unstructured interviews, than do large firms.
Just as small business managers can use Internet-based recruitment and selection tools, many low-tech tools are also available. We’ll look at two, streamlined interviews, and work-sampling tests.
Preparing for the interview
Even a busy entrepreneur can quickly summarize the kind of person who would be best for the job. These generally include:
Knowledge and experience
Motivation
Intellectual capacity
Personality
Factors to probe
Fortunately, the factors to probe are the same four the entrepreneur needs to think about in preparing for the interview.
Conducting the interview
As is the case with any size company, the interview should be conducted using a written plan and should be prepared for by a thorough review of a job application form and resume. Using structured and open-ended behavioral questions are best. The same questions should be used for all applicants for a given position.
Matching
Draw conclusions from your interview results and match them to your thinking about the job dimensions you determined prior to conducting the interview. You should then have a rational basis for making the right hiring decisions.
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13. Leveraging Small Size:
Familiarity, Flexibility, Fairness, Informality, and HRM
Work-sampling tests
Flexibility and the four-step training process
Job description
Task analysis record form
Job instruction sheet
Prepare training program
Informal training methods
Work sampling tests require candidates to perform actual samples of the job in question. This also can be a very simple way to select employees.  
One study in England found that smaller firms were much more informal in their approaches to training and development. Only about half had career development programs. Any management development training focused on learning specific firm-related competencies due to resource constraints. They also did not want to spend excessive time on employees who might then leave for another firm.
Limited resources or not, small businesses need training procedures. One of the simplest and most straightforward involves just four steps:
Write a job description.
Develop a task analysis record form.
Develop a job instruction sheet.
Prepare and deliver the training program for the job.
Small businesses can do many things to provide job-related personal improvement without actually establishing formal training programs. Some examples include offering tuition reimbursement, providing online training, sharing best practices, attending association meetings, and networking.
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14. Leveraging Small Size:
Familiarity, Flexibility, Fairness,
Informality, and HRM
Flexibility in benefits and rewards
A culture of flexibility
Work–life benefits
Recognition
Small business benefits for bad times
Simple retirement benefits
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 do small ones. However, many small firms seemed to overcome their bigger competitors by offering more flexibility.
Because of the familiarity that comes from owners personally interacting with the employees each day, small businesses do a better job of fostering a culture of flexibility. Even without extensive resources, small firms can offer employees work-life benefits that larger employers cannot match or cannot match quickly. For example, one employee may be able to work a compressed workweek while several others may prefer using flextime or job sharing we discussed earlier.
Studies demonstrate that recognition can often be as powerful as financial reward. The relatively personal nature of small business interactions makes it both easier and more important to recognize employees.
Small businesses suffered greatly from the recession. The cost of benefits jumped significantly, and small businesses have had to get creative to meet employees’ needs while still remaining cost effective.
There are several ways that small firms can provide retirement plans for their employees. The Pension Protection Act of 2006 contains a provision for a new type of retirement benefit that combines traditional defined benefits and 401(k) plans.
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15. Leveraging Small Size:
Familiarity, Flexibility, Fairness,
Informality, and HRM
Improved communications
Newsletter
Online
The huddle
Fairness and the family business
Effective communications are important for any manager, but especially for those managing small businesses. Simple programs, such as newsletters and online reporting, can prove effective. Huddles are very quick meetings often held on a scheduled basis to keep communication flow effective and efficient.
Most small businesses are family businesses, in that that the owner and one or more managers are family members. Being a non-family employee here isn’t always easy. They sometimes feel like outsiders. Some best practices include avoiding partiality in setting ground rules, treating people fairly, and erasing “family” privilege.
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16. Review Informal selection Streamlined interviews Work-sampling tests
Training
Flexibility in benefits and rewards
Communications
Fairness
So far, we have discussed how to take advantage of the smaller sizes of entrepreneurial ventures while helping to mitigate the resources larger businesses have with respect to HR. Using more informal methods of hiring such as networking can be easy especially if the owner has a clear understanding of the job and personality requirement he or she is seeking. Streamlining interviews with a simple plan, using samples of actual work to be performed and a simple four-step or even informal training program will move things along.
A plus for small businesses is the ability to provide flexibility in benefits and rewards. And, simple newsletters and informal communication practices can be invaluable to a small firm.
Finally, being fair with non-family members who are working alongside of your family is important. Equity and fairness as perceived by your employees is crucial to long-term success.
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17. How You Would Choose and Deal with a Professional Employee Organization (PEO)
Outside vendors that are used to outsource all or most human resource functions are generally called professional employer organizations, human resources outsourcers, or sometimes staff leasing firms. These vendors range from payroll companies to those that handle all of an employer’s human resource management requirements. Let’s discuss.
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18. Using Professional Employer Organizations
How do PEOS work?
Why use a PEO?
Lack of specialized HR support
Paperwork
Liability
Performance
Caveats
Warning signs
Employers turn to PEO’s for several reasons. By transferring the client firm’s employees to the PEO’s payroll, PEOs become co-employers of record for the employer’s employees. Small employers are likely to be faced with lack of specialized HR support or extensive paperwork. The Small Business Administration (SBA) estimates that small business owners spend up to 25% of their time on personnel-related paperwork.
In addition, staying in compliance with pension plan rules, Title VII, OSHA, COBRA, the Fair Labor Standards Act, and other personnel-related laws can be very time-consuming and mistakes may be made. Insurance and benefits are often an appealing reason to use PEOs. Obtaining and administering health and other insurance is more challenging for smaller firms than larger ones.
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.
There are several potential downsides to these firms. If your PEO is poorly managed or goes bankrupt, you could find yourself with an office full of uninsured workers. Several things may signal problems with the prospective PEO. One is lax due diligence.
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19. Review The use of PEOs Reasons for using PEOs Caveats
PEOs can be an invaluable resource for small and entrepreneurial firms. The firm and the PEO have co-responsibilities for the employers and both should conduct due diligence with the other. The small business should validate the professionalism of the PEO, the length of time in business, other firms who use them and even their financial viability. The PEO should carefully question the small business regarding their HR policies, practices, and even their philosophy of management. The business arrangement, however, can be very synergistic for both. The small business is relieved of not having specialized HR knowledge, certain liabilities, paperwork, and performance. The PEO continues to grow and effective manage employees using the knowledge and skills it has to produce results.
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20. How You Would Create a Start-up Human Resource System for a New Small Business
With just one or two employees you could keep track of everything in your head, or just write a separate memo for each HR action, and place it in a folder for each worker. But with more employees, you’ll need to create a human resource system comprised of standardized forms. Let’s talk about what that will take.
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21. Managing HR Systems, Procedures, and Paperwork
Basic components of manual HR systems
Basic forms
Other sources
Automating individual HR tasks
Packaged systems
Very small employers (say, with 10 employees or less) will probably start with a manual human resource management system. This generally means obtaining and organizing a set of standardized personnel forms for recruitment, selection, training, appraisal, compensation, safety, and many more. You also will need some means for organizing all this information for each of your employees. This list barely scratches the surface of what is required for the most elemental manual HR system.
Several direct-mail catalog companies offer a variety of HR Materials. Firms such as HRdirect or G. Neil Company can provide a comprehensive source of all needed HR forms. A basic packet of 10 copies of most forms needed can also be purchased from Staples or other office supply stores.
As the small business grows, it becomes increasingly unwieldy and time consuming to continue using a manual system. Computerizing individual human resource management tasks is a better alternative. There are a variety of packaged resources available. At the Web site of the International Association for Human Resource Information Management, a categorical list of HR software vendors can be found. .
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22. Managing HR Systems, Procedures, and Paperwork
Human resource information systems (HRIS)
Improved transaction processing
Online self-processing
Improved reporting capability
HR system integration
HRIS vendors
HR and intranets
The term information system refers to the interrelated people, data, technology, and organizational procedures a company uses to collect, process, store, and disseminate information. A computerized Human Resource Information Systems (HRIS) will make the job easier.
The day-to-day minutiae of maintaining and updating employee records take an enormous amount of time. HRIS packages substitute powerful computerized processing for a wide range of the firm’s HR transactions.
HR information systems also make it possible (or easier) to make the company’s employees part of the HRIS. For example, employees self-enroll in all their desired benefits programs over the Internet at a secure site.
Because the HRIS integrates numerous individual HR tasks installing an HRIS boosts HR’s reporting capabilities. Because the HRIS’s software components are integrated, they enable the employer to reengineer and integrate its HR function.
Many firms today offer HRIS packages. The Web site for the International Association for Human Resource Information Management is a good starting place for vendors.
Employers increasingly use intranet-based HR information systems for benefits communication. Employees can access the benefits homepage and review the company’s 401(k) plan investment options. They can get answers to frequently asked questions about the company’s medical and dental plans, and report changes in family status.
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23. Review Manual HR systems Automation HRIS
Online transaction and self-processing
Reporting and system integration
HR and intranets
We have reviewed the need to have at least a manual HR system in place that is organized and contributes to overall efficiencies. As a business grows, it becomes more complex and complexity can lead to mistakes. Automating a manual system is the next step and can be accomplished by using various software packages to remove some of the burden of manual record keeping.
The next step up the ladder is to consider using a Human Resource Information System. Many vendors provide systems that will work for your business. Some of the important considerations is whether the system is on or off-site, can it work with your existing hardware and can it grow with your business. An HRIS will speed your online HR transactions and can allow individuals to access parts of the system to check their benefits, for example.
An HRIS also will make reporting and tracking activities easier and will enable easier re-engineering of your HR practices and procedures when necessary.
Finally, using a company intranet empowers employees to access the benefits homepage and review the company’s 401(k) plan investment options. They also can get answers to frequently asked questions about the company’s medical and dental plans, and report changes in family status. A few of the many uses for human resource intranets include automating job postings and applicant tracking, setting up training registration, and providing electronic pay stubs.
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