Introduction
Changing HRM practices
with firm growth
Bernice Kotey and
Alison Sheridan
The authors
Bernice Kotey is a Senior Lecturer and Alison Sheridan an
Associate Professor in the New England Business School,
University of New England, Armidale, Australia.
Keywords
Small enterprises, Human resource management,
Business development, Australia
Abstract
Despite common perceptions about the informality of human
resource management (HRM) practices within small firms, few
studies have considered how HRM practices change with firm
size. This paper explores how HRM practices of small firms
change as the size of the firm increases. Using data from micro,
small and medium firms in Queensland, Australia, the paper
reviews the recruitment and selection practices, training
methods, performance appraisal and the maintenance of HR
records and policies in these firms. The findings indicate a move
towards hierarchical structures, increased documentation and
more administrative processes as the number of employees
increases. The increase is rapid initially and then occurs at a
slower pace thereafter. Such changes have implications for the
management of the employment relationship. The paper
concludes that HRM practices in small firms cannot be portrayed
by a standardised description and that management training and
advice for small firms must recognise the diversity associated
with this important sector of the Australian economy.
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Journal of Small Business and Enterprise Development
Volume 11 · Number 4 · 2004 · pp. 474-485
q Emerald Group Publishing Limited · ISSN 1462-6004
DOI 10.1108/14626000410567125
474
With nearly 950,000 private non-agricultural small
businesses in Australia providing 47 per cent of
total private sector non-agricultural employment,
the small business sector is a significant, and
growing, employer of labour in the Australian
economy (OSB, 2000). Employment growth in this
sector has averaged about 3 per cent annually since
1985, slightly higher than the growth rate for larger
businesses (OSB, 2000). While there is general
consensus that developing the HR function is
critical to the long-term success of small firms
(Sullivan, 1997; Marlow, 2000; Chandler and
McEvoy, 2000; Mazzarol, 2003) the literature
remains unclear as to how the practice of human
resource management (HRM) may vary between
small firms of various sizes. This paper aims to shed
light in this area by exploring how HRM practices
of small firms change with size of the firm and what
the implications of these changes are for the nature
of professional advice provided to small firms.
Human resource management in small
firms
While there is an extensive literature on HRM, it is
overwhelmingly based on HRM in large
organisations (Wilkinson, 1999; Kerr and
McDougall, 1999). The limited literature on
HRM in small firms has, until recently, tended to
stereotype the small business employment
relationship. The two extremes of “small is
beautiful” or a “bleak house” scenario characterise
much of the previous writing on HRM in small
firms (Barrett, 1999; Wilkinson, 1999). The
“small is beautiful” representations suggest that
small firms necessarily lead to close and
harmonious working relationships (Bird, 1989),
while the “bleak house” scenarios suggest that
working in small firms can be a health hazard for
employees, as the firms are dictatorially run and
offer poor working conditions (Stanworth and
Curran, 1989; Wilkinson, 1999). More recently,
there has been an increasing awareness that small
firms are complex, varied and influenced by a
range of factors (Loan-Clarke et al., 1999; Carroll
et al., 1999; Wagar, 1998; Mazzarol, 2003) and
that such simple categorisation does not
adequately capture the diversity of experiences
within small firms. From the existing research it
seems that HRM in smaller firms tends to be
informal compared with the formal HRM systems
and practices in larger firms (Wiesner and
McDonald, 2001; Mazzarol, 2003) and generally
remains the domain of the owner-manager
(Matlay, 2002). While Joyce and Woods (2003)
 Changing HRM practices with firm growth
Bernice Kotey and Alison Sheridan
point to the role formal planning processes to bring
about change and innovation play in the growth of
the firm, the literature does not generally explain
the transition of HRM practices from “informal”
to “formal” as the firm grows. It is this gap that this
paper seeks to fill. Specifically, the objectives of
this study were to explore how HRM practices
change with firm growth, and in particular, which
aspects of HRM practices are likely to become
formal early in the growth process and which
changes occur later. The implications of the
observed changes to survival and competitiveness
of small, growing firms are discussed.
Definition of small and medium firms
In Australia, there are several definitions of small
firm. The Australian Taxation Office defines small
firms as those with total income of below $10million
while according to the Australian Bureau of
Statistics (ABS) a firm is small if it employs less than
20 workers and medium if it employs up to 199
employees, regardless of the industry sector in which
it operates (OSB, 2000). The definition of small
firms by the ABS was adopted for this study.
However, small firms were further categorised into
“micro firms” (if they employed less than five
workers) and “other small firms” (if they employed
between five and 19 employees). This categorisation
conforms to a number of joint publications by the
ABS and the Department of Employment,
Workplace Relations and Small Business
(1997-1999). Medium firms in this study were
restricted to those employing up to 100 workers, as
at the time of the survey there were only a handful of
firms with more than 100 employees on the
Sunshine Coast and these were public companies
(SCEDB, 1996). These firms were excluded from
the study to avoid distorting the results.
HR practices in small firms
Researchers have described recruitment sources
used by small firms as largely informal, usually by
word of mouth from family, friends, or trusted
employees (Marlow and Patton, 1993; Carroll et al.,
1999). Others report evidence of recruitment from
newspaper advertisements, government
employment agencies, employee referrals, and
unsolicited applicants but do not relate these to firm
size (Carroll et al., 1999). Selection procedures in
small firms are noted to be largely based on the
personal judgement of the owner-manager,
established through one-to-one interviews (Golhar
and Deshpande, 1997; Kotey, 1999) with emphasis
on “fitting in” and little attention to paper
qualifications or previous work record (Carroll et al.,
1999). Consequently, good potential employees are
not selected because they pose a threat to the valued
independence of the owner-manager (Stanworth
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Journal of Small Business and Enterprise Development
Volume 11 · Number 4 · 2004 · 474-485
and Curran, 1989). Similarly, training in small
firms has been defined as informal and on-the-job,
with little or no provision for management
development (Loan-Clarke et al., 1999; Marlow
and Patton, 1993). Narrative descriptions of
employee performance, assessment of their ability
to meet targets and the use of rating scales, are
appraisal methods frequently identified with small
firms (Hornsby and Kuratko, 1990), however, their
association with specific firm sizes within the broad
definition of small firm is not clear.
Kotey (1999) stated that few owner-managers
have formal and professional policies on human
resource related issues such as promotions,
incentives and disciplinary actions and that minimal
documentation of policies and procedures leaves
little scope for continuity in the event of sicknesses,
death or sale of the business. This coupled with
nepotism and cronyism raises questions of fair
treatment of all employees (Bird, 1989). In many
cases, both employers and employees are said to be
ignorant of their roles, rights and obligations in this
relationship. Carroll et al. (1999) found no evidence
of systematic job analysis in small firms in the
United Kingdom (UK). These researchers did not
investigate the extent to which their findings apply
to various size categories of small firms.
Although it is largely acknowledged that HRM
practices tend to be informal in smaller firms and
more formal in larger firms (Wilkinson, 1999), the
literature does not explain the transition from
“informal” to “formal” as the firm grows, nor has
this transition been empirically examined. It is not
clear when hierarchical structures replace the flat
and simple structures that characterise very small
firms and when owner-managers begin to delegate
operational responsibilities to middle managers.
The development of practices associated with the
management of middle managers over time is not
clearly understood in the current literature
(Heneman et al., 2000; Katz et al., 2000). In light of
these observations this study examines how HRM
practices change with firm size, in particular, which
practices are likely to become formal early in the
growth process and the implications for survival and
competitiveness of small growing firms.
Hypotheses development
From the extant literature on HR in small firms, it
is expected that small firms will increase their use of
formal recruitment sources such as newspapers,
government and private agencies, and educational
institutions with growth and as the pool of suitable
employees from informal sources such as word of
mouth and family and friends becomes depleted.
To reduce errors in selecting employees recruited
from sources unfamiliar to the owner-manager,
selection procedures will be intensified through the
 Changing HRM practices with firm growth
Bernice Kotey and Alison Sheridan
application of multiple selection techniques. As the
number of operational staff and span of control
increase, middle managers will be employed to take
up responsibility for daily operations of the
business and to supervise operational staff.
Owner-managers will delegate training and
performance appraisal of operational staff to
middle managers. The adoption of formal HRM
practices at the managerial level will lag behind that
at the operational level, in the early stages where
managerial staff are few, and likely to be friends
and/or family. Differences in the application of
formal HRM practices between operational and
managerial staff would diminish as more specialist
skills are recruited from outside familial sources.
Procedures will be standardised to ensure
consistent application and for efficiency, as
employee numbers increase. Documentation will
also increase for purposes of accountability and as
part of standardising procedures. While these
processes are prescribed in most HRM texts, the
transformation from the informal practices of very
small firms to these more formal practices is not
clearly demonstrated. Following from the above,
these hypotheses were developed for testing:
H1. A greater variety of formal recruitment
sources such as newspaper advertisements is
employed with firm growth.
H2. Screening of candidates is intensified
through the use of multiple selection
methods as firm size increases.
H3. Responsibility for training and performance
appraisal of operational staff shifts from the
owner-manager to middle management
with firm growth.
H4. Development of managerial staff is given
greater attention as the firm grows.
H5. Documentation of human resource policies
and procedures increase with firm size.
H6. The application of formal HRM practices at
the managerial level lags behind that at the
operational level in small firms but the
differences are minimised with firm growth.
Methodology
Data collection
To gather information from small firms concerning
their HRM practices and policies, a mail survey of
“micro”, “small” and “medium” firms on the
Sunshine Coast in Queensland, Australia was
conducted[1]. The eight-page questionnaire
covered general information on the business,
demographic details of respondents, recruitment
and selection practices, performance appraisal,
training methods and human resource records and
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Journal of Small Business and Enterprise Development
Volume 11 · Number 4 · 2004 · 474-485
policies. Kaman et al. (2001) noted that these are
HRM areas prone to change with firm growth.
Analytical technique
One-way analysis of variance (ANOVA) was used
to examine differences in HRM practices of
employers in the three size categories for variables
measured at interval and ratio levels. Variables
measured by nominal scales were analysed using
Chi-square tests. The two techniques test the null
hypothesis that k independent samples come from
the same population. Where significant differences
were indicated by ANOVA, differences between
the groups were examined using Tukey tests of
significance of difference to control Type 1 errors.
Similarly, where the Chi-square tests indicated
significant difference between the three groups, the
differences were further investigated by cross
tabulations.
Response
Out of the 1,330 questionnaires sent, 371[2]
useable responses were received – a response rate of
about 28 per cent. This response is consistent with
similar HRM surveys involving small firms (for
example, Deshpande and Golhar, 1994).
Nevertheless, to address the possibility of
non-response bias, the “final wave” of respondents
(to surrogate late respondents for non-respondents)
was compared to the initial groups of respondents
within each size category. Chi-square and t-test
statistics revealed no significant differences at the
5 per cent level for any of the variables in the study.
Of the 371 responses, 84 (22 per cent) were
micro-firms, 211 (57 per cent) were in the small firm
category, and 76 (21 per cent) were medium firms. A
comparison of business characteristics between this
regional sample and national samples of firms in
similar size categorises showed no significant
differences (Department of Employment, Work
Relations and Small Business, 1999).
Business details and demographics of
owner-managers in the sample
On average, medium firms employed significantly
more permanent (full-time) and flexible staff
(part-time and casual) than both micro and small
firms (Table I). There were more full-time workers
in small firms than in micro firms (Table I),
although the number of part-time and casual staff
were similar for both groups. The proportions of
permanent and flexible staff to all employees were
the same for firms in the three groups, with the
exception that medium firms employed relatively
more part-time staff than micro firms. An
appropriate mix of full-time and flexible staff is
necessary for effective labour cost management.
Full-time employees provide the stability in
 Changing HRM practices with firm growth Journal of Small Business and Enterprise Development
Bernice Kotey and Alison Sheridan Volume 11 · Number 4 · 2004 · 474-485

Table I Firm characteristics – employees and number of locations: results of ANOVA and multiple comparisons
Comparison of means
Variables Business group Means F-value Sig 1-2 (sig) 1-3 (sig) 2-3 (sig)
Full-time employeesa Micro (1) 1.9 150.69 0.000 2 4.88 221.69 216.81
Small (2) 6.8 0.000 0.000 0.000
Medium (3) 23.6
Part-time employeesa Micro (1) 0.58 11.99 0.000 2 0.46 23.42 22.95
Small (2) 1.05 0.748 0.000 0.000
Medium (3) 4.00
Casualsa Micro (1) 0.79 43.16 0.000 2 1.11 29.65 28.53
Small (2) 1.90 0.479 0.000 0.000
Medium (3) 10.43
Proportion of full-time employees to all employeesa Micro (1) 0.61 2.18 0.114 2 0.08 20.03 0.05
Small (2) 0.69 0.11 0.74 0.54
Medium (3) 0.64
Total 0.66
Proportion of part-time employees to all employeesa Micro (1) 0.17 2.98 0.05 0.06 0.08 0.02
Small (2) 0.11 0.13 0.05 0.65
Medium (3) 0.09
Total 0.12
Proportion of casuals to all employeesa Micro (1) 0.23 1.53 0.22 0.03 20.04 20.07
Small (2) 0.20 0.73 0.68 0.20
Medium (3) 0.27
Total 0.22
Operational staffa Micro (1) 2.26 188.79 0.000 2 4.80 226.58 221.79
Small (2) 7.06 0.000 0.000 0.000
Medium (3) 28.84
Managerial staffa Micro (1) 0.60 82.01 0.000 2 1.26 24.12 22.85
Small (2) 1.86 0.000 0.000 0.000
Medium (3) 4.70
Proportion of operational staff to all employeesa Micro (1) 0.81 0.366 0.69 0.02 0.00 20.02
Small (2) 0.79 0.78 1.00 0.77
Medium (3) 0.81
Total 0.80
Proportion of managerial staff to all employeesa Micro (1) 0.19 0.366 0.69 2 0.02 0.00 0.02
Small (2) 0.21 0.78 1.00 0.77
Medium (3) 0.19
Total 0.20
No. of businessesa Micro (1) 1.16 11.74 0.000 2 0.24 20.98 20.74
Small (2) 1.41 0.349 0.000 0.000
Medium (3) 2.15
Note: avariables measured at ratio level

operations required for permanent growth and
staff on flexible contracts supports temporal
fluctuations in growth (English, 2001). Such
flexibility has been cited as critical to small firm
success (Mazzarol, 2003). As can be seen in Table
I, the ratio of permanent to flexible staff was
maintained throughout the growth process.
The number of employees at both operational
and managerial levels increased significantly across
the three size categories however, the ratio of one
manager to four operatives was maintained for all
firm sizes. This suggests additional managerial
staff were employed at various firm sizes to
maintain a consistent span of control.
The number of businesses owned and operated
in separate locations increased between small and
477
medium firms and between micro and medium
firms (Table I), however the increase was not
significant for micro and small firms. In micro
firms, the niche market strategy, with a single or
few product lines is effectively contained in one
location. As firms grow the niche strategy is
gradually replaced by a mass-market strategy,
market segmentation and broader product lines, or
even by diversified products (Mintzberg et al.,
1995). Thus in medium firms production facilities
may be established in other locations in pursuit of
more markets.
On average, medium firms were older, with the
majority aged more than ten years (see Table II).
Consistent with their age, a relatively higher
proportion of medium firms were inherited, as
 Changing HRM practices with firm growth
Bernice Kotey and Alison Sheridan
older firms are likely to have been passed on to
second-generation owners. The majority of
respondents were male (79 per cent) and were
aged between 41 and 60 years (71 per cent). Many
(53 per cent) were employees in another business
before commencing their current business or had
prior experience as business owners (44 per cent).
As can be seen in Table II, there were more females
in micro firms than in both small and medium
firms. This is consistent with the broader
literature, which indicates that female
owner-managers tend to operate smaller firms
(Brush, 1992; Still, 2002). The proportion of
respondents with prior experience in the private
sector was fewer for medium firms than for micro
firms (Table II). Given the percentage of medium
firms aged ten years or older, this finding may
reflect national and to some extent international
changes in employment preferences over the years
– from the public sector to the private sector and
self-employment (Timmons, 1999).
Discussion of results
All the hypotheses were supported by the results of
the analyses. Adoption of more formal HRM
practices increased with firm size, with the move
towards formality occurring early in the growth
process. This was demonstrated by the greater
change towards more formal HRM practices
between micro and small firms than between small
and medium firms. Further, although the adoption
of formal HRM practices at the managerial level
lagged behind that at the operational level for small
and micro firms, these differences were minimised
at the medium level.
Recruitment and selection
The results show that a greater range of formal
recruitment sources, such as newspaper
advertisements and government recruitment
agencies, was employed with firm growth. Further,
screening of candidates was intensified through the
use of multiple selection procedures as firm size
increased. The use of formal recruitment sources
Table II Firm and owner-manager details: chi-square statistics
Variables Micro firms (%)
Business details
Age – 10 yrs or older 36
Inherited businesses 1.2
Personal details
Females 31.3
Private sector experience 59
Journal of Small Business and Enterprise Development
Volume 11 · Number 4 · 2004 · 474-485
and selection techniques at the managerial level
lagged behind that at the operational level,
particularly for micro and small firms.
At the operational level, word of mouth was the
main recruitment source for all three types of firms.
However, the greater use of government
employment agencies with firm size and the
increased use of newspaper advertisements and
school recruitment among small and medium firms
(Table III) demonstrate the increased formal
recruitment sources as firms grow. This is consistent
with the need to search widely for the best employee
for each position as the pool of potential employees
from informal sources such as word of mouth
becomes exhausted. A comparison of small and
micro firms shows that this trend begins early in the
growth process and could indicate that the skills
required to support growth are not readily available
within the confines of friends and family.
At the managerial level, the need for suitably
qualified managerial staff to fill gaps in the
owner-manager’s skills and to take responsibility for
operational activities with increasing firm size is
indicated by the sharp rise in use of formal
recruitment sources such as newspaper
advertisements. However, recruiting managers by
word of mouth is still common in some small and
medium firms (Table III), which may reflect a desire
of the owners to work with managers with whom they
are familiar. At the medium level, the use of
newspaper advertisements in the majority of firms
indicates an emphasis on employee competency in the
recruitment process. This reflects the higher number
of managerial staff required and greater specialisation
in tasks at this stage. That a smaller percentage of
micro and small firms reported using the various
recruitment sources at the managerial level is not
surprising in light of the size of these firms. With less
than 20 employees, recruitment at the managerial
level is not a frequent occurrence in these firms.
Interviews were the predominant selection
methods at the operational level for all three
groups of firms. In addition, more small and
medium firms than micro firms reviewed
applications and investigated candidates’
backgrounds from previous employers (Table IV).
The use of a greater variety of selection techniques,
Percentage of respondents
Small firms (%) Medium firms (%) Total (%) Chi sq. Sig
49 58 48 8.09 0.018
2.9 11.8 4.3 13.39 0.001
19.4 15.8 21.4 6.78 0.034
55 40.8 53 6.09 0.048
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 Changing HRM practices with firm growth Journal of Small Business and Enterprise Development
Bernice Kotey and Alison Sheridan Volume 11 · Number 4 · 2004 · 474-485

Table III Chi-square statistics for recruitment sources

Percentage of respondents
Variables Micro firms (%) Small firms (%) Medium firms (%) Total (%) Chi sq. for three groups
Word of mouth (O) 58.3 57.3 48.7 55.8 1.98
Word of mouth (M) 9.5 25.6 23.7 21.6 9.43***
Newspapers (O) 27.4 50.7 55.3 46.4 16.2***
Newspapers (M) 7.1 27.5 50 27.5 36.76***
Govt. agencies (O) 25 40 50 38.5 10.86***
Govt. agencies (M) 0 4.3 9.2 4.3 8.2**
Private agencies (O) 3.6 8.1 13.2 8.1 4.934*
Private agencies (M) 1.2 8.1 15.8 8.1 11.44**
Professional firms (O) 1.2 2.8 1.5 2.2 1.098
Professional firms (M) 0 7.1 9.2 5.9 7.29**
Schools (O) 1.2 6.2 10.5 5.9 6.28**
Schools (M) 0 2.4 5.3 2.4 4.676*
Internal transfers (O) 1.2 6.2 9.2 5.7 5.036*
Internal transfers (M) 1.2 8.1 6.6 6.2 4.895*
Notes: O – operational level; M – managerial level; ***= p , 0.01; **= p , 0.05; *= p , 0.10

Table IV Chi square statistics for selection methods

Percentage of respondents
Micro firms Small firms Medium firms Total
Variables (%) (%) (%) (%) Chi sq. for three groups
Interviews (O) 76.5 85.3 82.9 82.9 3.17
Interviews (M) 22 49.3 65.8 46.6 31.88***
Qualifications (O) 58.5 71.6 64.5 67.2 4.872*
Qualifications (M) 14.6 45.5 61.8 42.0 38.55***
Review application (O) 20.7 42.2 48.7 38.8 15.42***
Review application (M) 9.8 28.9 52.6 29.5 34.93***
Prev. employment (O) 34.1 49.8 42.1 44.7 6.08**
Prev. employment (M) 12.2 30.8 36.8 27.9 13.96***
References (O) 15.9 26.1 27.6 24.1 4.010
References (M) 6.1 16.6 27.6 16.5 13.26***
Practical test (O) 24.4 22.7 15.8 21.7 2.050
Practical test (M) 1.2 4.7 5.3 4.1 2.228
Written test (O) 2.4 5.2 3.9 4.3 1.131
Written test (M) 2.4 3.3 5.3 3.5 0.987
Medical exam (O) 1.2 2.4 6.6 3.0 4.554*
Medical exam (M) 0 1.4 6.6 2.2 9.34***
Notes: O – operational level; M – managerial level; ***= p , 0.01; **= p , 0.05; *= p , 0.10

as more employees join the firm from outside the
network of friends and family, is in consonance
with the accompanying increased risk in selection
and greater cost of recruitment. A greater variety
of selection techniques is advised in HRM texts
(for example Dessler et al., 1999) however, greater
variety can also entail higher costs, which micro
firms would prefer to avoid. Also, at the micro
level, employee qualities required by the
owner-manager can be easily assessed through
interviews. The increased use of the various
selection techniques was greater between micro
and small firms than between small and medium
firms, indicating greater increase in the adoption of
formal practices during the early stages of growth
than during the later stages.
479
At the managerial level, selection techniques
such as interviews, review of application letters and
assessment of candidates’ qualifications increased
with firm size (Table IV). Moreover, investigations
from previous employers, and requests for reference
letters were more prevalent in small and medium
firms than in micro firms (Table IV). These
selection methods were less frequently applied at
the micro level, as employment of managerial staff is
rare and as potential managers are likely to be
family and/or friends, reducing the need for
in-depth screening and reflecting the more limited
resources available to micro firms. In comparison to
the operational level, the percentage of firms that
applied the various selection methods at the
managerial level increased from small to medium
 Changing HRM practices with firm growth Journal of Small Business and Enterprise Development
Bernice Kotey and Alison Sheridan Volume 11 · Number 4 · 2004 · 474-485

firms, consistent with the increasing number of
specialist staff recruited from outside the confines of
family and friends at the larger firm size.
Training
The results support the hypotheses that
responsibility for training operational staff shifts
from the owner-manager to middle management
and that greater emphasis is given to development
of managerial staff as the firm grows.
At the operational level, the majority of employers
in all three categories of firms provided on-the-job
training for their employees. Although the
predominant training method was owner-managers
watching and correcting employees on the job, the
use of this method declined with firm size whilst
delegation of this responsibility to supervisors
increased with firm size (Table V). Shifting
responsibility for training operatives from
owner-managers to middle management is
consistent with increasing delegation of operations
to middle management as the firm grows. In
addition, the decline in the percentage of firms that
allow operatives to pursue external training (when
small and medium firms are compared) may imply
that in-house training by middle management may
be more cost-effective as employee numbers
increase. At the micro level, training operational
staff by watching and correcting their performance
is justified on cost grounds (Baron and Kreps,
1999).
As firms grow, the increased emphasis on
external training for managers signifies concern for
both their training and development, possibly to
enhance their ability to contribute to
organizational success (Kaman et al., 2001,
Rowden, 2002) and indicating greater awareness
of management succession. The move towards
watching and correcting managerial staff on the
job, as firm size increased, is consistent with the
shift in the role of owner-managers from managing
operations to managing managers (Timmons,
1999). It may also reflect the desire of
owner-managers to maintain control and direct the
business towards their visions. Relatively little
attention was given to training managers at the
micro level possibly because they are usually family
or friends with whom business matters are
discussed informally. Also, the high level of
uncertainty and change at the micro level could
render extensive training of staff ineffective.
MacMahon and Murphy (1999) noted that
extensive training could produce highly specialised
staff unable to adapt to changing work
requirements. The finding that only a minority of

Table V Chi-square statistics for training variables

Percentage of respondents
Micro firms Small firms Medium firms Total
Variables (%) (%) (%) (%) Chi sq. for three groups
Training methods
On the job owners – O 90.2 80.5 69.7 80.4 10.54***
On the job owners – M 14.6 29 46.1 29.3 18.8***
By supervisors – O 8.5 27.1 52.6 28.3 38.13***
By supervisors – M 1.2 5.7 10.5 5.7 6.35**
Job rotation – O 35.4 44.3 47.4 42.9 2.68
Job rotation – M 3.7 10.5 15.8 10.1 6.52**
External courses – O 26.8 45.2 31.6 38.3 10.30***
External courses – M 7.3 24.3 40.0 23.7 23.23***
Encourage ext. sem – O 18.3 29.0 14.7 23.7 8.03**
Encourage ext. sem – M 9.8 33.3 35.5 28.5 18.37***
Oblige ext. sem – O 6.1 15.7 7.9 12 6.68**
Oblige ext. sem – M 2.4 9 14.5 8.7 7.27**
Orientation – contents
Employment conditions 63 78.2 82.9 75.8 10.03***
Duties 69.1 89.1 88.2 84.5 18.79***
Intro. to workplace 58 86.7 88.2 80.7 34.39***
OHS 45.7 53.1 67.1 54.3 7.57**
Management policies 29.6 56.9 52.6 50 17.64***
Business objectives 39.5 48.8 39.5 44.8 3.26
Checklist 25.8 34.8 51.4 36.7 10.53***
Multi-skilled – some 55.6 62.9 79.7 64.7 10.59***
All multi-skilled 39.5 34.8 20.3 32.9 7.28**
Ability to run the firm 81.5 84.4 80.6 83 0.713
Notes: O – operational level; M – managerial level; ***= p , 0.01; **= p , 0.05; *= p , 0.10

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Bernice Kotey and Alison Sheridan Volume 11 · Number 4 · 2004 · 474-485

firms in all three categories used training methods
other than on-the-job training concurs with the
existing literature which describes training in small
firms as “essentially informal, reactive, and short-
term in outlook” (Hill and Stewart, 2000, p. 114).
Small and medium firms were more likely than
micro firms to provide orientation training for new
employees (Table VI) and to cover more issues
during orientation (Table V), reflecting their
greater resources and the need to minimise the risk
and cost of employing staff with no previous
connection to the business. Efforts to ensure
consistency in the orientation process increased
with firm size – about half of medium firms had a
checklist of issues covered during orientation
compared with a third for small firms and a quarter
for micro firms (Table V) – indicating greater
standardisation of HRM practices with growth to
enhance effectiveness and ensure efficiency.
The higher increase in the rate of coverage of
various orientation topics between micro and small
firms compared with small and medium firms
supports the contention that the adoption of more
formal HRM practices begins early in the growth
process and slows down thereafter.
More medium firms than micro and small firms
indicated that some of their employees were multi-
skilled. In contrast, the proportions of micro and
small firms with a totally multi-skilled workforce
were higher than for medium firms (Table V). This
finding supports greater specialisation of tasks at
the medium level. The majority of respondents in
all three categories of firms indicated that
operations would continue where any one or more
employees or even the owner-manager were unable
to attend to their normal duties.
Performance appraisal
Consistent with the hypotheses, responsibility for
appraising performance of operational staff shifted
from owner-managers to middle managers and
although appraisal of managers lagged behind that
of operatives in micro and small firms, the
differences diminished in medium firms.
The majority of firms appraised performance of
their employees, particularly in small and medium
firms (Table VII). For micro firms, the close
association with employees enables owner-managers
to observe and correct wrong performance almost
immediately, whereas under the more formal
processes of the larger firms, performance appraisal
occurred at less frequent intervals (Table VII).
Rating scales were the most popular appraisal
methods at the operational level and some
employers compared performance between
employees. As the number of operatives increased,
appraisal of their performance was increasingly
delegated to managers. The use of peer- and
self-appraisals also increased with firm size.
However, at the operational level the use of other
appraisal methods rarely changed as firms grew.
Appraisal of managerial performance occurred
in fewer firms than for operatives, indicating that
formal performance appraisal is uncommon at the
managerial level. Nevertheless appraisal of
performance of managers increased with firm size.
The most common methods of appraising

Table VI Results of ANOVA for variables measured at the interval and ratio levels
Comparison of means
Variables Business group Means F-value Sig 1-2 (sig) 1-3 (sig) 2-3 (sig)
Orientationc Micro (1) 3.52 7.15 0.001 2 0.55 20.73 20.18
Small (2) 4.07 0.004 0.001 0.564
Medium (3) 4.25
Job descriptionb Micro (1) 1.11 14.48 0.000 2 0.43 20.64 20.21
Small (2) 1.87 0.000 0.000 0.119
Medium (3) 2.07
Application lettersc Micro (1) 2.13 17.40 0.000 2 0.98 21.25 20.27
Small (2) 3.11 0.000 0.000 0.362
Medium (3) 3.39
Application formsc Micro (1) 1.89 33.39 0.000 2 0.87 22.10 21.22
Small (2) 2.76 0.000 0.000 0.000
Medium (3) 3.99
Appointment lettersc Micro (1) 1.57 14.35 0.000 2 0.89 21.27 20.38
Small (2) 2.46 0.000 0.000 0.162
Medium (3) 2.84
Records on employeesb Micro (1) 2.04 17.0 0.000 2 0.52 20.66 20.15
Small (2) 2.55 0.000 0.000 0.348
Medium (3) 2.70
Notes: avariables measured at ratio level; bvariables measured on a three-point Likert scale; cvariables measured on a five-point Likert
scale

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Table VII Chi-square statistics for performance appraisal variables

Percentage of respondents
Micro firms Small firms Medium firms Total
Variables (%) (%) (%) (%) Chi sq. for three groups
Performance appraisal 70 82.4 80 79 5.95**
Daily 29.3 19.5 13.2 20.4 6.53**
Monthly 11 24.8 32.9 23.4 11.11***
Ratings on duties – O 48.8 53.3 56.6 53.3 1.02
Ratings on duties – M 8.5 32.9 50 31 32.52***
Ratings on quality – O 48.8 53.3 44.7 50.5 1.78
Ratings on quality – M 8.5 24.8 30.3 22.3 12.49***
Comparisons – O 22 32.4 35.3 30.7 4.06
Comparisons – M 3.7 11.4 13.2 10.1 4.96*
Meeting target – O 20.7 25.7 17.1 22.8 2.61
Meeting target – M 7.3 18.1 21.1 16.3 6.60**
Observe behaviour – O 13.4 21.4 17.1 18.8 2.66
Observe behaviour – M 3.7 7.6 17.2 8.7 9.7***
Self-assessment – O 4.9 17.1 9.2 12.8 9.05***
Self-assessment – M 2.4 11.0 11.8 9.2 5.87**
Peer assessment – O 8.5 19.0 21.1 17.1 5.64*
Peer assessment – M 1.2 8.1 14.5 7.9 9.58***
Supervisors – O 19.5 46.7 47.4 40.8 19.74***
Supervisors – M 6.1 20.5 25.0 18.2 11.16**
Train needs assessment 22.2 41.0 44.7 37.6 10.82***
Promotion 7.4 22.4 35.5 21.8 18.28***
Train poor performers 65.4 80.0 69.7 74.7 7.79**
Notes: O – operational level; M – managerial level; ***= p , 0.01; **= p , 0.05; *= p , 0.10

managerial performance were by rating scales and
to a lesser extent the ability to meet targets
(Table VII). The use of targets has a flow-on effect
– by holding managers accountable for
performance targets, they will in turn ensure that
these targets are achieved at the operational level.
The increase between micro and small firms in the
proportion of firms that appraised management
performance shows that formal appraisal of
managers starts early in the growth process.
Relatively fewer avenues for promotion in micro
firms explain the lesser use of information from
performance appraisal to assess employee training
needs and promotional prospects when micro
firms are compared with small and medium firms.
That both micro and medium firms were less likely
than small firms to train staff with consistently low
performance before terminating their employment
(if training failed) suggests that micro firms may
not always be able to afford the cost of extensive
training for poor performing employees and that
for medium firms, which may have the relevant
legal and administrative structures for dismissal in
place, it may be cheaper to dismiss than to train
very poor performing staff.
Human resource policies and records
The findings suggest increasing standardisation
and documentation of human resource procedures
with growth of the firm and that these practices
482
begin early in the growth process. This is
supported by the increasing proportion of firms
with human resource policies and employee
records across firm size. Emphasis on occupational
health and safety (OHS) across all firm sizes
reflects the fact that it is an area prone to legal
dispute. Further, a narrowing gap between written
OHS policies and verbal communication of these
policies to employees as firm size increased
indicates greater use of formal communication
methods with firm growth (Table VIII).
As top management is distanced from
employees, it becomes necessary to maintain
detailed records on each employee for
management control purposes. This is indicated
by the higher propensities of small and medium
firms to maintain such records compared with
micro firms (Table VI). These records also serve as
a source of reference in the event of litigation. At
the micro level, the close bond between employer
and employees, close control by the employer and
the high level of informality in HRM practices
reduce the need for detailed records on employees,
although this may be risky in the event of litigation.
While stringent human resource policies may work
against the flexibility required to respond to the
frequent changes at the micro level, they are
important to ensure uniform and fair treatment of
all employees as employee numbers increase.
 Changing HRM practices with firm growth Journal of Small Business and Enterprise Development
Bernice Kotey and Alison Sheridan Volume 11 · Number 4 · 2004 · 474-485

Table VIII Chi-square statistics for variables representing HR policy and records measured at nominal level
Percentage of respondents
Micro firms Small firms Medium firms Total
Variables (%) (%) (%) (%) Chi sq. for three groups
HRM policies
Working hours 22.1 48.0 60.0 44.2 22.93***
Annual leave 16.2 42.3 60.6 40.1 29.51***
Sick leave 14.9 33.1 53.8 33.1 23.74***
Overtime 11.1 30.9 50.0 30.2 24.37***
Employment termination 12.3 31.1 47.8 30.3 20.89***
Long service leave 9.6 22.7 47.5 24.5 26.58***
Disciplinary procedures 8.3 22.2 45.5 23.9 26.68***
Grievance handling 6.8 20.1 30.8 19.2 12.86***
Promotion 9.7 8.9 16.7 10.7 2.87
Written OHS policies 60 71.3 89.3 72.5 17.09***
Communicating OHS 88.5 97.5 95.5 95.3 7.08**
Personnel records
Sick & annual leave 42.7 68.6 77.6 64.7 24.34***
Workers’ compensation 31.7 54.3 69.7 52.4 23.54***
Job description 22 48.6 53.9 43.8 21.03***
Appointment letter 14.6 40.5 52.6 37.2 26.58***
Training records 17.1 35.2 47.4 33.7 16.72***
Performance records 17.1 29.5 44.7 29.9 14.44***
Probation 6.1 13.3 26.3 14.4 13.53***
Termination 63 78.5 89.2 77.2 15.59***
Poor performance 91.8 85.6 85.3 86.9 1.95
Absenteeism 72 64 66.7 66.4 1.62
Disobedience 47.6 59.3 77.3 60.4 14.74***
OHS non-compliance 34.1 35.9 48 38 4.1
Job title 18.5 41.7 56.6 39.7 24.59***
Duties 18.5 40.3 59.2 39.4 27.35***
Remuneration 18.5 40.8 53.9 38.6 21.75***
Superannuation 13.6 26.1 38.2 25.8 12.38***
Leave entitlements 13.6 24.2 36.8 24.5 11.51***
Probation 9.9 34.6 44.7 31.3 24.76***
Notes: ***= p , 0.01; **= p , 0.05; *= p , 0.10

There were significant differences between micro
firms on one hand, and small and medium firms on
the other in writing of job descriptions and issuing
application letters. However, the tendency to write
job descriptions and provide application letters
was similar for small and medium firms (Table VI).
This confirms that such administrative procedures
that minimise errors in the recruitment and
selection process are implemented early in the
growth process as employees unknown to the
owner-manager join the firm. Also, as frequency of
recruitment and numbers of potential candidates
for each position increase it becomes necessary to
standardise applications for both accuracy and
efficiency in selection, as indicated by the
increasing use of application forms across firm size
(Table VI). That the writing of job descriptions
were similar between small and medium firms
imply that jobs are not always clearly defined even
in the larger firms. The increasing propensity to
issue appointment letters (Table VI) and to cover
483
more issues in these letters with firm growth
(Table VIII) support the growing implementation
of administrative controls to replace direct control
by the owner-manager as the firm expands.
Conclusions
Clearly, the findings of this study suggest that HR
practices within the small to medium firms studied
are influenced by the size of the firm, changing
with size towards the prescribed practices. The
responses for those surveyed indicate a move
towards hierarchical structures, increased
documentation and more administrative processes
as the number of employees increases. This means
HRM in small and medium firms is dynamic and
cannot be portrayed by standardised descriptions,
as tends to be the case in the existing literature;
rather, the particular context, including size, must
 Changing HRM practices with firm growth
Bernice Kotey and Alison Sheridan
be made explicit for any meaningful analysis to be
undertaken.
In micro-firms, the close relationship between
employer and employees replaces formal controls
and reduces the need for detailed documentation,
leaving the firm malleable to the frequent changes
that characterise business strategy at this stage.
This flexibility is critical to the success of the micro
firm (Caudron, 1993). If a micro-firm is at the
introductory stage of its life cycle, business strategy
is likely to be highly intuitive and oriented towards
aggressive search for opportunities. The owner-
manager pays little attention to formal managerial
roles and concentrates on innovation and on
handling disturbances (Hodgetts and Kuratko,
1998). Increased documentation and formal
structures and controls will reduce the flexibility
required to respond quickly to the changing
strategic orientation.
As the firm grows, product lines may be
broadened to support a strategy of market
segmentation and to confront competition
(Mintzberg et al., 1995). Increased production
means more employees are required at the
operational level. More managers are also required
to fill gaps in the owner-manager’s expertise and to
take responsibility for daily operation of the firm as
the owner-manager takes on more strategic roles,
as demonstrated by the transfer of responsibility
for training and performance appraisal of
operatives to middle management. The
organisational structure moves from flat, simple
and centralised to hierarchical, complex and
decentralised. Administrative procedures and
controls replace direct control by the
owner-manager. Documentation is increased as
part of the control process, to enable
accountability, particularly as the number of
stakeholders increase. Also, as part of the control
process, greater attention is given to the selection,
training and performance appraisal of managers.
While the analyses show that a significant
proportion of SMEs implement more formal HRM
practices with growth, HRM still remains informal
in the majority of firms, particularly at the small
level. It could be that successful implementation of
the structures and procedures in the HR area
necessary to support growth, distinguish successful
from unsuccessful SMEs. This issue warrants
further attention in future studies.
The findings also indicate that the adoption of
formal HRM practices increases at a more rapid
rate during the early stages of growth than during
the latter growth stages and that the application of
formal HRM practices at managerial level lags
behind that at the operational level for small firms.
This gap is reduced at the medium level as more
specialist staff is employed.
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Implications
Management training and advice for small
business, which emphasise increased
documentation, may be counter-productive for
certain firm sizes. Such advice may reduce
flexibility of the firm and hinder speedy response to
changing strategic visions and environmental
variables. HRM practices such as formal
recruitment sources, extensive screening of
candidates and extensive training of employees
may not be necessary in micro firms, where
employee numbers are small, the majority are
family or friends and where the owner is in a
position to exercise direct control over activities in
the business. Moreover, at the micro level
owner-managers may not have the resources
required to implement these HRM practices.
Owner-managers should be made aware of the
importance of maintaining a balance in HRM
practices that enable proper accountability and
control, reduce the risk of litigation, and ensure
statutory requirements are met, whilst at the same
time providing adequate flexibility for response to
changing strategies and operations. The
appropriate balance will differ with size of the firm.
Future research
The study did not examine industry effects on the
changes in HRM practices and this could be the
subject of future research. A longitudinal
examination of HRM practices of firms as they
progress through various growth stages should
complement the findings in this research. Finally
the self-report, single administrative nature of the
questionnaire may pose limitations in that
responses were vulnerable to response consistency
bias. Future research could address this limitation.
Notes
1 It was not possible to carry out a fully stratified random
sample of firms in these size categories due to lack of
information on employment sizes in the databases from
which the sample was drawn. However, the responses
reported below show reasonable representation of all size
and industry groups.
2 This was the final response after a mail follow-up was
conducted.
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Further reading
Department of Employment, Work Relations and Small Business
(1997), A Portrait of Australian Business, Results of the
1995 Business Longitudinal Survey, Small Business
Research Program, AGPS, Canberra.
Department of Employment, Work Relations and Small Business
(1998), A Portrait of Australian Business: Results of the
1996 Business Longitudinal Survey, Small Business
Research Program, AGPS, Canberra.
OSB (1999), Annual Review of Small Business 1999, Office of
Small Business, Paragon Printing, Canberra.