Determinants of the loyalty of employees in businesses

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Advisor’s assessment ..................................................................................................................................................................... ..................................................................................................................................................................... ..................................................................................................................................................................... ..................................................................................................................................................................... ..................................................................................................................................................................... ..................................................................................................................................................................... ..................................................................................................................................................................... ..................................................................................................................................................................... ..................................................................................................................................................................... ..................................................................................................................................................................... ..................................................................................................................................................................... ..................................................................................................................................................................... ..................................................................................................................................................................... ..................................................................................................................................................................... ..................................................................................................................................................................... ..................................................................................................................................................................... Advisor’s signature 1 Table of contents Chapter 1: Introduction .................................................................................................. 4 1.1. Problem statement ................................................................................................... 4 1.2. Research objectives ................................................................................................. 6 1.3. Research questions .................................................................................................. 6 1.4. Research scope ........................................................................................................ 6 1.5. Research methodology ............................................................................................ 7 1.6. Research structure ................................................................................................... 8 Chapter 2: Literature Review ......................................................................................... 9 2.1. Theoretical literature ............................................................................................... 9 2.1.1. Approaches in the study of the loyalty of employees .......................................... 9 2.1.2. Benefits of building and maintaining the loyalty of employees ........................ 10 2.2. Empirical literature................................................................................................ 11 Chapter 3: Research Methodology ............................................................................... 14 3.1. Data sources .......................................................................................................... 14 3.1.1. Qualitative study ................................................................................................ 14 3.1.2. Quantitative study .............................................................................................. 15 3.2. Variables ............................................................................................................... 15 3.3. Research model ..................................................................................................... 19 2 3.4. Method of estimation ............................................................................................ 21 3.5. Method of testing .................................................................................................. 22 Chapter 4: Research Results ........................................................................................ 23 4.1. Synthesis of the survey result................................................................................ 23 4.2. Descriptive statistics ............................................................................................. 26 4.3. Adjustment of scale ............................................................................................... 28 4.4. Factor analysis ....................................................................................................... 30 4.5. Adjusted model ..................................................................................................... 33 4.6. Testing of the adjusted model ............................................................................... 35 4.7. Result of testing hypothesis .................................................................................. 40 4.8. Testing the loyalty rate between male and female ................................................ 42 4.9. Testing the loyalty among employees at different levels...................................... 43 4.10. Testing the loyalty among employees at different positions .............................. 45 4.11. Testing the loyalty among employees in different business types ...................... 47 Chapter 5: Conclusion, Recommendation and Limitation ........................................... 50 5.1. Performance and topic’s contributions ................................................................. 50 5.2. Practical signification and recommendation ......................................................... 52 5.3. Limitation and direction for coming studies ......................................................... 55 References .................................................................................................................... 58 3 CHAPTER 1: INTRODUCTION 1.1. Problem statement: Today, in the harsh conditions of the market, competition for human resources has always been a hot issue in the company. And so, to attract talent, companies constantly improve their policies of development of human resources under which compensations and benefits, and many other treatment regimes are always particularly interested by the company leaders. Human resources management (HRM) issues include aspects: attendance, payroll, screening, hiring, training, coaching, evaluating the work of staff, drafting the remuneration policy, the labor remuneration regime, etc. But one of the most important issues that should not be ignored by HRM professionals is the planning and implementation of strategic development of human resources, attracting talent to work for the company as well as not making them anxious with their thought “the grass is always greener on the other side of the fence”. According to results from a recent study by Walker Information and Hodson Institute that provided some information about the loyalty of workers in organizations as follows:  Only 24% of employees found that they were really loyal, true commitment of contribution to the objectives and activities of the company, and available to work for the firms in at least two years.  33% of employees had no commitment, no plan to survive in the firms in the long term. 4  Up to 39% of employees have to be seen as being reluctant to work. They worked only for a few specific reasons (wages, favoritism, waiting to find another job, etc.) but did not have a specific plan to benefit to the businesses. All business owners will admit that they have to always pay very high prices for the leave of key employees. One of the problems often seen is the leave of the key employees will entail the leave of key customers. The study showed that 70% of customers leave because of the leave of key staff. Moreover, if there is continuous passing of the key staff, it may cause underground waves of exit of all staff remaining. Currently, the problem of how to retain employees is a headache for business owners and managers of enterprises in Vietnam. Especially after Vietnam joined the WTO, the domestic enterprises need to expand production and business; in addition to the need of high quality of human resources, they also have to know how to retain qualified employees. It’s a matter of business survival. Thus, the business must identify, consider and evaluate accurately factors that affect the loyalty of employees, on the basis that the business will have appropriate direction in the management of human resources, in order to have positive move to retain talent for the business to avoid brain drain phenomenon in the future. That's why I chose the topic “Determinants of the loyalty of employees in businesses”. The paper attempts to identify the most important determinants of the loyalty of employees and provide an integrated analysis on the identified determinants. 5 1.2. Research objectives: The general objective of this study is to identify factors which affect the loyalty of employees in businesses in Ho Chi Minh (HCM) city. To achieve the general objective, the study is designed to meet the following specific objectives: (1) Find out determinants of the loyalty of employees in businesses in HCM city. (2) Suggest implications to improve the management of human resources of the businesses. 1.3. Research questions: The research aims to address the following questions: (1) What are the determinants of the loyalty of employees in businesses in HCM city? (2) What suggestions can this study have to improve the loyalty of employees in businesses in HCM city? 1.4. Research scope: Research objects who are currently working in the economic organizations; including Limited Liability Company, Joint Stock Company, State-owned Company, Joint Venture Company, Private enterprise and Enterprise 100% foreign capital. Since the time constraint, the study is focused on investigating the objects who are currently working in businesses in HCM city in positions of staff, team leaders, supervisors and middle managers. 6 1.5. Research methodology: The research is conducted over 2 phases:  Phase 1: using qualitative research methods to confirm and supplement the criteria of assessment, adjust scales and questionnaires to support the quantitative research process.  Phase 2: using quantitative research methods, using the measured variables in qualitative research phase to determine the factors and the measurement properties; after adjustment, final scale is used for formal interview. Samples and sample information: Quantitative survey was conducted in the area of HCM city. Sample objects are currently working in businesses in HCM city, conducted by direct interviews with the questionnaires, selecting a random sample of students in night classes (in-service, degree 2, master, etc.) at some universities in HCM city like University of Economics HCM City, Open University of HCM City, University of Natural Sciences, University of Social Sciences and Humanities, University of Industry, etc. Measurement model included 29 observed variables, using 5-level Likert scale range (1: totally disagree to 5: completely agree) to quantify; and 7 hypotheses according to minimum rule 5 x 3 = 15 samples for each measurement variables (Bentle & Chou, 1987). So that the original sample was calculated: 29 x 15 = 435. Collecting and analyzing data: Using data processing techniques by SPSS software, testing conducted through the following steps: (1) preliminary assessment of the scale and reliability of variables measured by Cronbach Alpha coefficients, and the values (factor loading) by EFA (Exploratory Factor Analysis); (2) testing the hypothesis and the overall model fit. After that, T-Test would be used for testing 7 and ANOVA (Analysis of Variance) would be used for analyzing to find out significant differences of a few specific groups. 1.6. Research structure: Chapter 1: Introduction Chapter 2: Literature review Chapter 3: Research methodology Chapter 4: Empirical results and discussion Chapter 5: Conclusion, recommendation and limitation 8 CHAPTER 2: LITERATURE REVIEW 2.1. Theoretical literature: 2.1.1. Approaches in the study of the loyalty of employees: There are many approaches in the study of the loyalty of employees in businesses. Loyalty can be considered as a component of organizational commitment, or an independent concept. Allen & Mayer (1990) focused on three psychological states of employees associated with the organization. Employee loyalty to the organization can derive from their true feelings: (1) they will stay with the organization despite elsewhere higher salaries, better working conditions, (2) they can be loyal to their organizations just because they do not have the opportunity to earn a better job, and (3) they can be loyal to their organizations because the moral standards of the organizations that they pursue. According to Mowday, Steers and Poter (1979), loyalty is the "intention or desire to maintain membership of the organization". Mowday's famous definition of loyalty is similar to the concept of "Maintain" in the research of Aon Consulting Institute for many years in US: employees who intend to stay with the organization in the long term will stay with the organization even though they get more relatively attractive offers from other organizations. According to Johnson (2005), today employees are more loyal to their profession than loyal to their employer; and the nature of the relationship between employees and employers has changed fundamentally, and it is necessary to revaluate the loyalty concepts. By the Loyalty Research Center (2004), employee loyalty is as commitment of employees associated with the organization's success, and they believe that working for this organization is the best choice of them. According to the scale model of 9 employee loyalty of Man Power (2002), the evaluation criteria of loyalty include: (1) be willing to recommend their company as a good place to work; (2) be willing to introduce the products and services of the company; and (3) Intend long-term commitment to the company. In the scope of this study, definition of Mowday et al. (1979) and the scale of employee loyalty of Man Power (2002) are used. 2.1.2. Benefits of building and maintaining the loyalty of employees: The value of employee loyalty is extremely large, reducing employee turnover cost is just one visible example; and the benefit of retaining experienced and reliable staff is invaluable. Seniority, experience and stability of the organization will be the things we think of first, but beyond the personal experience will give us an overview of the benefits to the organization of the construction and maintenance of employee loyalty in today's economic situation.  On the revenue side: The loyal employees tend to work better than what customers expect and always have high morale in their best ability. Both of these characteristics are very important for the company to retain loyal customers and bring in more sales.  On the expense side: The loyal employees will stay working with the company in long term, refuse offers from the opponents, not actively look for a new job and always present the company as a good workplace. All four of these attitudes have a positive impact to the operating cost of the company, because the company will avoid a significant cost for replacing staff. In other words, instead of just focusing on holding the employees (try to keep the employees who were laid off), managers need to be more positive and proactive in 10 recognizing the benefits of understanding, managing and enhancing the loyalty of employees. Thus, despite the loyalty of employees is recognized as one of the factors which is most crucial to the success of the business, it is not surprising to note that companies are facing with the critical challenges in developing a team of enthusiastic and dedicated. 2.2. Empirical literature: Herzberg (1968): In this study, Herzberg interviewed a group of employees to find out what made them satisfied and dissatisfied on the job. He revealed two important factors that affect job satisfaction: motivation and hygiene. Motivation – hygiene theory factors pointed out that factors creating of job satisfaction and job dissatisfaction were separate. Factors that led to job satisfaction are called motivation factors, including achievement, recognition, the work itself, responsibility and advancement. Factors that led to job dissatisfaction are called hygiene factors, consisting of administrative policies, supervision, salary, interpersonal relations and working conditions. Herzberg’s study had put a strong foundation for later research on factors affecting job satisfaction. Albert S. King and Barbara J. Ehrhard (1997): In their study, they described the commitment cohesion exercise, which is an instrument that increases the understanding of employees’ attraction to “the ideal” or empowered organization. The exercise measures employees’ perception of loyalty, values, and organizational commitment. Three conditions, i.e. loyalty, values and commitment, influence empowerment structures within an organization. The exercise supported the notion of a stepwise movement from loyalty to value congruence (or 11 agreement) to organizational commitment. It also demonstrated how progressive phases are associated with perceived quality of work life and connected to an empowered organization. Zhen Xiong Chen, Anne S. Tsui and Jiing-Lih Larry Farh (2002): In this research, they investigated the relationship between loyalty to supervisor and employee's in-role and extra-role performance in comparison with that of organizational commitment in the People's Republic of China. Two studies were conducted. In the first study, a five-dimension loyalty to supervisor scale was developed and validated. In the second study, the relationships between loyalty to supervisor, organizational commitment and employee performance were examined. Results indicated that loyalty to supervisor was more strongly associated with both inrole and extra-role performance than organizational commitment. Frederick Reichheld (2006): In his study, he reported that loyalty, for those who plan to stay with an employer at least two years, can be affected by several factors, including benefits and pay, working environment, job satisfaction and customers. Employee loyalty is critical for organizations as constant turnover or churn can be very expensive. In his report he stated that one of the most effective ways to improve employee loyalty is to make employees feel like they are an important part of the organization. His report found that only 55 percent of the employee surveyed feel like their organization treats them well. He suggested that an employee feedback system can help raise employee loyalty by providing two-way communications between employees and management. Artz (2010): 12 According to the results of Artz’s study, fringe benefits are significant and positive determinants of job satisfaction. Fringe benefits are also believed to have a profound impact on the loyalty of employees. It plays as a motivator that helps to improve employee performance and reduce employee turnover. In summary, there are many studies on employee loyalty to the organization, but most previous studies only focused on a general way to a certain extent, such as organizational culture, leadership style, etc. There is now no study has ever addressed the specific factors affecting the loyalty of employees. Therefore in this study each specific factor such as salary, working conditions, the appropriate target, etc. will be examined to find out how each of them will affect the loyalty of employees in businesses. 13 CHAPTER 3: RESEARCH METHODOLOGY 3.1. Data sources: 3.1.1. Qualitative study: The first step of qualitative research is to adjust the scale. The variables are adjusted and supplemented in accordance with the form of bipartite discussions under a pre-prepared content based on the available scales. The content of discussions will be recorded, synthesized as a basis for the adjustment and addition of variables. Objectives:  Determine how managers of human resource understand the expectation of staff? In their opinion, what are the factors that make staff more loyal to the organization?  Determine what is expected by staff in the organization? Which elements make them more loyal to the organization? Interviews:  Management level: Human resources managers of FedEx Representative Office and Kinh Do Corporation were interviewed.  Staff level: 20 employees of different departments of FedEx Representative Office were interviewed. And 20 employees of different departments of Kinh Do Corporation were interviewed. The results of this preliminary research shall be used to design the questions for the official research. 14 3.1.2. Quantitative study: This is the stage of formal study with data collection techniques of interviewing through a questionnaire. The collected data is processed by SPSS software. After encoding and cleansing date, the formal analysis will be implemented as follows:  Assess the reliability of the scale: the reliability of the scale was assessed through Cronbach’s alpha coefficients, from which inappropriate variables will be eliminated if the Corrected Item–Total Correlation is small (<0.3) and the scale will be accepted as Cronbach’s alpha coefficient is satisfactory (> 0.6).  Then, analyze the factor will be used to test the convergence of the component variables of the concept. The variables with a singular correlation coefficient between variables and other factors (factor loading) less than 0.5 will be disqualified. Analytical methods of Principal axis factoring with Promax rotation will be done and stops when extracting factors of Eigenvalue greater than 1.  Finally, test the hypothesis of a structural model and the level which fit the overall model. 3.2. Variables: (1) High income / salary: Remuneration has always been one of the most challenging issues for managers in every business. Businesses often have multiple points of view, different goals when designing their remuneration system. However businesses generally are oriented to the four basic objectives: to attract staff, to maintain good staff, to stimulate employee motivation and to meet the requirements of the law. 15 For most people, employment and quality of employment are often measured by the income of the job. Thus, income is considered as a measure of work as well as the success of the employee at work. High income makes people more satisfied at least in term of physical secure so that they pay more attention to work and try to prove their worth even more. Therefore, it makes an enormous impact on the morale of employees. This impact is reflected in the following aspects:  When the employees earn and feel worthy of their dedication, they will be enthusiastically excited at work.  They have little intention of leaving the company for another job while they are satisfied with their current income.  They are more responsible for the work they are in charge.  They have more discipline in observing the rules of the company. So the hypothesis is set out: H1: High income / salary will make employees more loyal to the businesses. (2) Favorable working conditions The working environment has always been interested by workers because it is related to personal convenience and it is also a factor which makes them complete the tasks. Workers do not like the working environment dangerous, disadvantageous and inconvenient. Temperature, light, noise and other environmental conditions must be consistent. Moreover, many workers prefer working closer to home, with the working facilities clean, modern and appropriate. (Lam, 1998) So we hypothesize that: 16 H2: Favorable working conditions will make employees more loyal to the businesses. (3) Target suitability Targets are considered suitable when employees realized their goals and values are relevant to their commitment to the goals and values of the company. The target suitability is similar to the concept of the suitability of individual - organization, which is defined as the compatibility of personal values and beliefs with the rules and values of the organization (O’Reilly et al., 1991). The suitability of individual – organization is the basis of the most important prediction of many factors to be studied (Chatman, 1991; Kristof, 1996; Van Vianen, 2000). Research in sales planning indicated that the target is a prerequisite for a positive working attitude and employee behaviors (Netemeyer et al., 1997). Commitment to the goals and values of the organization plays an important role in the service and retail sectors. The implementation of the policies and activities of an organization related to services require the commitment of employees to its goals and values. Therefore we hypothesize that: H3: Target suitability will make employees more loyal to the businesses. (4) Support from management Support from the management is the central focus of many researches. Support from the management is defined as the level of consideration and support that employees can receive from the supervisors (Netemeyer et al., 1997). Leaders must have ability to help and treat employees fairly, encourage two-way communication, and recognize the contribution of the employees to implement the goals of the organization. Therefore the hypothesis is set out: 17 H4: Support from management will make employees more loyal to the businesses. (5) Support from colleagues Support from the colleagues will help employees, especially newcomers, learn new skills and knowledge. It will help promote the business, increase the productivity and decrease time and energy wastage. The term "knowledge is power" is antiquated in a team environment, knowledge should be shared so the team can work well together, learn from each other and respect each other's views and ideas. So we hypothesize that: H5: Support from colleagues will make employees more loyal to the businesses. (6) Fair reward Fair reward exists when employees are rewarded worthily with their work pressure and achievement (Netemeyer et al., 1997). Reward fairness is based on the concept of fair distribution (Lane & Messe, 1971). The concept of fairness contained both fairness in distribution and procedure. Previous studies indicated that the fair distribution in related to employment relationship is more important than fair procedure. Fairness theory pointed out each individual follows a particular rule of fairness governing their attitudes and behaviors (Lane & Messe, 1971). This suggests that employees who are rewarded fairly will have a more positive perspective and willingness to act in the direction of supporting businesses. Thus we hypothesize that: H6: Fair reward will make employees more loyal to the businesses. (7) Empowerment 18 Empowerment exists when supervisors believe in the ability of making decisions of employees and encourage them to use initiative (Conger & Kanungo, 1998; Hartline et al., 2000). Empowerment means nearly autonomous tasks. Core of this concept is the willingness of supervisors to subordinates to make decisions within the scope of regulation and use initiative. Empowerment can be a tool to increase organizational effectiveness because it can enhance confidence in the ability to perform the employee's job. Empowerment is particularly important for employees who contact directly with customers because it creates flexibility in meeting customer requirements (Bowen & Lawler, 1992). Thus the hypothesis is set out: H7: Empowerment will make employees more loyal to the businesses. 3.3. Research model: This study uses a linear regression model to test the influence of the determinants on the loyalty of employees in businesses. Loyalty = β0 + β1*High income + β2* Favorable working conditions + β3* Target suitability + β4* Support from management + β5* Support from colleagues + β6* Fair reward + β7* Empowerment + ε 19 High income Favorable working conditions Target suitability Support from management Loyalty of employees Support from colleagues Fair reward Empowerment 20
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