Research: 4 Reasons We Don't Invest in HR Even Though We Should

Doing my PhD reading I stumbled on a fascinating article (Pfeffer, 2017) that answered the question I’ve been wondering about for a while: if investing in HR is profitable, why don’t we do it? Knowing that not everyone is reading scientific articles in their leisure time, I assembled this short article that presents the main points of the article through quotes directly taken from the main paper. This is, of course, quite redacted, so if you like this I highly recommend checking out the original.

The paradox

There exists a paradox. The fact that the 3 statements below are both true and coexist together. Please see the article (Pfeffer, 2017) to review a ton of research supporting these claims.

1. Workplaces in America and elsewhere show pervasive job dissatisfaction, distrust, and disengagement, with the evidence suggesting that these problems are getting worse and have a number of negative consequences for employers as well as employees.

2. Second, how people are managed and their job satisfaction and job attitudes are both substantively and statistically significant predictors of a number of dimensions of organizational performance. 

3. In spite of the fact that much of what is required to build engaged and successful organizations is at once well known and not always costly to implement, many, maybe most, organizations have failed to take appropriate actions, thereby, in some sense, “leaving money on the table.” 

Why Organizations Don’t Do What They Should 

Reason #1: We are copycats

Companies (and individuals) tend to copy what others do, sometimes in an almost mindless fashion. In organization studies, the basic idea of companies copying what others do is predicted by institutional theory (Scott, 1995). Institutional theory argues that certain ways of doing things become taken for granted and companies, to achieve social legitimacy and to conform to social expectations for appropriate behavior, adopt these institutionalized practices (DiMaggio and Pow- ell, 1983). The importance of social relations also predicts conformity behavior, since similarity is an important basis of attraction. 

Reason #2: HR has lost its power

The human resources department, which has traditionally been an advocate of employee well-being, has lost power. Many human resource functions are being outsourced, with a corresponding loss in the size of the department and also the budget it controls. In the political dynamics that shape policies ranging from the adoption of internal labor market arrangements (Pfeffer and Cohen, 1984) to the use of certain organizational hiring standards (Cohen and Pfeffer, 1986), the rise in power of groups not particularly interested in people or human resources and the decline in power of employee advocates provides a reason why the adoption of high-performance work practices may be retarded. 

Reason #3: Intangibles are poorly measured

Information about the possible offsetting benefits—reduced turnover, higher levels of trust and employee engagement, reduced absenteeism, more discretionary effort—is typically either not measured at all or not measured and presented in a way that benefits and costs can be readily compared. Social psychology has taught us that what is salient is focal. People and companies, if they use facts at all, decide on the basis of the facts at hand—as imperfect, imprecise, and even misleading as those facts might be. Consequently, the structure of organizational measurement and information systems virtually guarantees that human resource management practices will be undervalued and not much considered in decisions about people. 

Reason #4: Our culture and beliefs

As Frank (1988, p. 237) noted, 

“Our beliefs about human nature help shape human nature itself.” 

This argument, developed extensively elsewhere (Ferraro, Pfeffer, and Sutton, 2005), can be briefly illustrated with an example: Miller and Ratner (1998) demonstrated in a prisoner’s dilemma experimental context that participants systematically overestimated the power of self-interest to affect the attitudes and behavior of others. However, because subjects saw self-interest as a norm—a way they were expected to behave and a prediction of how others would behave—they tended to justify even altruistic actions in terms of self-interest. With expectations that others would behave in a self-interested fashion, people would naturally take those anticipated behaviors into account in planning their own behavioral strategies.

As Miller (1999) noted, people could come to believe that they should behave in a self-interested fashion to avoid appearing foolish, gullible, or naive. Even simple language or labeling differences can cue such behavioral expectations. Liberman, Samuels, and Ross (2004) used the same prisoner’s dilemma payoff matrix in a set of experiments but in one instance called the game the Wall Street Game and in another, the Community Game. Mutual cooperation was the rule and defection the exception when the game was labeled as “Community,” while the opposite was true when the game was labeled “Wall Street.” 

Bonus reason: 

Many investment analysts and others in the financial community do not appear particularly sympathetic to firms that adopt high-commitment work arrangements, possibly because these companies may be viewed as putting employees ahead of shareholders. Ironically, in reality, these practices are saving shareholders money.

Opportunities and collaboration:

I am the CEO of a Finnish startup called Pandatron. We are making coaching 10X cheaper with text coaching and chatbots and helping businesses solving their people challenges at scale. Some examples of the work we are involved with include strategy execution, remote work, and training follow up projects. Check out more here and contact me if you want me to tell you more or see opportunities to collaborate.

Beyond that, I am also a PhD candidate at Aalto University, which is why I stumbled on this scientific article. I am researching self-managing organizations and would be happy to discuss if you are interested in this topic.


Cohen, Yinon, and Jeffrey Pfeffer. (1986). “Organizational Hiring Standards.” Administrative Science Quarterly, 31(1): 1–24.

Ferraro, Fabrizio, Jeffrey Pfeffer, and Robert I. Sutton. (2005). “Economics Language and Assumptions: How Theories Can Become Self- Fulfilling.” Academy of Management Review, 30(1): 8 –24.

Frank, Robert H. (1988). Passions within Reason: The Strategic Role of the Emotions. New York: Norton.

Miller, Dale T. (1999). “The Norm of Self- Interest.” American Psychologist, 54(12): 1053– 60.

Miller, Dale T., and R. K. Ratner. (1998). “The Disparity between the Actual and Assumed Power of Self-Interest.” Journal of Personality and Social Psychology, 74(1): 53–62.

Liberman, Varda, Steven M. Samuels, and Lee Ross. (2004). “The Name of the Game: Predictive Power of Reputation vs. Situational Labels in Determining Prisoner’s Dilemma Game Moves.” Personality and Social Psychology Bulletin, 30(9): 1175– 85.

Pfeffer, J. (2007). Human resources from an organizational behavior perspective: Some paradoxes explained. Journal of Economic Perspectives, 21(4), 115-134.

Pfeffer, Jeffrey, and Yinon Cohen. (1984). “Determinants of Internal Labor Markets in Organizations.” Administrative Science Quarterly, 29(4): 550 –72.

Scott, W. Richard. (1995). Institutions and Organizations. Thousand Oaks, CA: Sage. 

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