CENTER FOR HOSPITALITY RESEARCH CORNELL CENTER FOR INNOVATIVE HOSPITALITY LABOR AND EMPLOYMENT RELATIONS RESEARCH BRIEF Understanding Human Resource Practices and Outcomes in Franchise Businesses by Tashlin Lakhani Franchise businesses are an essential and growing part of the U.S. economy, accounting for nearly 800,000 establishments, 9 million jobs, and $800 billion in output annually. The importance of franchising is particularly evident in hospitality. Hotel and restaurant companies often use franchising to expand faster than would be possible through company ownership alone. Today, food and hospitality account for 65% of employment in franchise businesses. However, we know very little about human resource management in franchises. This is noteworthy because a large body of empirical research has shown that investments in human resource (HR) practices such as employee selection, training, compensation, internal promotions, and employee discretion improve organizational performance including outcomes such as employee turnover, sales, and customer satisfaction. 1 Center for Hospitality Research • Cornell Center for Innovative Hospitality Labor and Employment Relations At the same time, franchisors face legal constraints median wage, local union density, local market hotel when it comes to human resource management. In growth, and local market sales per hotel – I find that recent years, changing legislation and debates over franchisee-owned hotels make significantly lower joint employer status have raised questions about what investments in all three sets of HR practices compared franchisors can and should do when it comes to the to company-owned hotels. On average, franchisee- employees in their franchised locations. owned hotels are less likely to use formal assessment methods in selecting workers, spend substantially less PART ONE: FRANCHISEE-OWNED VERSUS to recruit, screen, and train new workers ($578 less per COMPANY-OWNED HOTELS new hire), are associated with 10% lower annual salary, Using a unique survey of HR practices and offer 2.58 fewer benefits (out of 6), have fewer full-time outcomes in a U.S. based limited-service hotel chain, workers, and invest less in a high involvement work this study illustrates a compelling argument for design – with 10% less information sharing and lower franchisors to provide franchisees with more guidance employee discretion than company-owned hotels. on how to structure their human resource systems to achieve optimal performance. The analysis suggests that franchisees’ inexperience and strong profit Franchisee-owned hotels make motives lead them to underinvest in human resource practices compared to company-owned operations. significantly lower investments Recognizing the constraints imposed by joint employer status, franchisors may be able to provide optional HR in all three sets of HR practices tools and best practices for franchisees that draw from their knowledge and experience in the operations they compared to company-owned directly own and manage. hotels. This study compares the HR investments of 178 franchisee-owned hotels and 305 company- The only area where we do not observe significant owned hotels. Three sets of ‘high performance’ HR differences is initial training and time to proficiency, practices – practices that have been linked to improved which includes both formal and informal or on-the-job organizational performance – are examined: training. Franchisors typically provide formal training • Skill-enhancing HR practices that reflect in- over areas such as brand standards and service skills, vestments in creating a high-skilled work- which should lead to similar levels of overall training force: formal selection methods, costs to re- across franchised and company hotels. Moreover, cruit, screen, and train new employees, initial because training has generally been viewed as training, and time to proficiency. necessary for maintaining uniformity across operations, • Motivation-enhancing HR practices that re- franchisors may feel more comfortable providing flect investments in enhancing employee mo- training and training-related materials to franchisees tivation and commitment to the organization: and their employees without risking joint employer competitive pay, benefits, job security, and status. internal promotion opportunities. PART TWO: OWNERSHIP TYPES & SIZE • Opportunity-enhancing HR practices that re- flect investments in a high involvement work In the second part of the study, I use data on design that allow employees to use their franchisee ownership types and franchisee size to skills in ways that benefit the organization: examine whether differences in HR practices remain. information sharing, meetings to discuss First, I compare active franchisees who own and work-related issues, and employee discretion operate their hotels to passive franchisees who hire a over their jobs. salaried manager or third-party management company to manage the hotel on their behalf. I find that both active and passive franchisee-owned hotels invest Controlling for a range of establishment and labor significantly less in HR practices than company-owned market characteristics – including hotel size, hotel age, hotels. Second, I compare single-unit franchisees to hotel location, RevPAR, local unemployment rate, local 2 Center for Hospitality Research • Cornell Center for Innovative Hospitality Labor and Employment Relations multi-unit franchisees of varying sizes. I find that both single-unit and multi-unit franchisees invest significantly less in HR practices than company-owned By working together and hotels. The results of this study provide strong support providing franchisees with that franchisee decisions over HR investments are being driven, in part, by profit motives. Because guidance on HR practices, franchisors decentralize human resource management to franchisees and because HR practices entail higher franchisees can be “in business costs with little immediate payoff, franchisees appear for themselves, but not by to reduce investments in these practices. By contrast, company-owned hotels invest more in HR practices that themselves.” have been linked to higher organizational performance in the long-run. Accordingly, in today’s environment characterized by uncertainty regarding whether and how IMPLICATIONS franchisors can assist franchisees with human resource These findings suggest that franchisees may management, this study indicates that companies benefit from greater assistance with their human should not distance themselves completely from resource practices. If franchisors distance themselves franchisees and their employees. Without the expertise from employment matters, franchisees are likely to of franchisors, franchisees may be left guessing on how have little guidance as to how HR systems should to successfully manage their employees. By working be structured to achieve optimal performance. In the together and providing franchisees with guidance absence of this guidance, franchisees’ inexperience and on HR practices, franchisees can be – as the famous lack of knowledge regarding the benefits of certain HR saying goes – “in business for themselves, but not by practices may lead them to focus on cutting labor costs themselves.” Companies that do so are likely to find and in turn, product and service quality. that this guidance pays off by creating a more stable Recognizing the importance of HR practices, some workforce that is motivated to provide superior companies are beginning to offer their franchisees non- customer service and maintain brand standards. g mandatory tools and suggestions for effective human resource management. For example, a leading lifestyle hospitality company in the U.S. recently launched an owner’s catalogue with à la carte tools and best practices that can help franchisees better manage their employees. Explaining the value of the owner’s catalogue, the Chief Culture Officer noted that “tools and services for areas such as recruitment and ongoing training will help bring greater clarity and consistency across managed and franchised operations.” Importantly, franchisees also appear receptive to these tools. Referring to franchisor involvement in HR matters, the Director of Human Resources for a franchisee-owned hotel in a leading hotel brand said “[If we had more communication from corporate], it would be wonderful, it would be fantastic. It would give me so much peace of mind all the time.” Similarly, discussions with restaurant operators revealed a positive response to recent COVID-19 HR best practices shared by brands, noting that it was helpful to know what company operations were doing to function effectively. 3 Center for Hospitality Research • Cornell Center for Innovative Hospitality Labor and Employment Relations PUBLICATION INFORMATION Lakhani, Tashlin. “How and Why Does Franchise Ownership Affect Human Resource Practices? Evidence from the US Hotel Industry.” ILR Review, (December 2020). https://doi.org/10.1177/0019793920972661. ABOUT THE AUTHOR Tashlin Lakhani is an Assistant Professor of Management and Organizations at the Cornell Nolan School of Hotel Administration in the SC Johnson College of Business. She received her PhD from the ILR School at Cornell University. Prior to joining the Cornell Nolan School in 2020, she was on the faculty at the Fisher College of Business at The Ohio State University. Her research investigates the determinants and outcomes of human resource practices, with a particular emphasis on how firm ownership structures influence human resource investments and organizational performance. Her current work focuses on franchise businesses in the hotel and restaurant industries. She teaches courses on human resource management and franchising. 4 Center for Hospitality Research • Cornell Center for Innovative Hospitality Labor and Employment Relations CHR Advisory Board Robert Mandelbaum ’81 Director of Research Information Services CBRE Hotels Research Pablo Alonso Kelly McGuire MMH ’01, PhD ’07 Chief Executive Officer Manging Principal, Hospitality HotStats ZS Scott Barghaan Jacqueline Nunley Vice President & American General Manager, Senior Industry Advisor - Travel & Hospitality Travel, Transportation, & Hospitality Vertical Salesforce Salesforce David Oppenheim Scott Berman ’84 Senior Vice President of Global Insights, Principal & US Hospitality Industry Leader Analytics, & Data PwC IHG Vivek Bhogaraju MMH ’06 Dan O’Sullivan GM, Lodging Revenue Performance Solutions Vice President of Sales, EMEA Expedia Group Translations.com Carolyn Corda MPS ’89 Andrada Paraschiv Chief Marketing Officer & Chief Commercial Vice President of Hospitality Officer Beekeeper ADARA Michael Partridge ’92 Ian-Michael Farkas Vice President of Sales & Revenue Analysis Vice President, Strategic Accounts Marriott International Local Measure Stephanie Perrone Goldstein ’01 Chuck Floyd, P ’15 and ’18 Data, Analytics, and AI Leader, Travel & Global President of Operations Hospitality Industry Hyatt Deloitte Eliot Hamlisch Jess Petitt ’05 Executive Vice President, Loyalty & Revenue Senior Vice President, Commercial Strategy, Optimization Insights & Analytics Wyndham Hotels & Resorts Hilton Tim Hentschel ’01 Geoffrey Ryskamp Chief Executive Officer Vice President, Sector Head - Retail & HotelPlanner.com Hospitality Steve Hood Medallia Senior Vice President of Research Guido Salvatori, MMH ‘02 STR Senior Director of Product Integrations Ashli Johnson Duetto Vice President of Education Michele Sarkisian AAHOA Partner Jamie Lane Avenger Capital Vice President of Research Stacy Silver AirDNA President Mark Lomanno Silver Hospitality Group CHR Advisory Board Chair Dan Skodol, MMH ’04 Partner & Senior Advisor Vice President of Data Science & Analytics Kalibri Labs Cendyn 5 Center for Hospitality Research • Cornell Center for Innovative Hospitality Labor and Employment Relations Liesl Smith Debbie Brown Senior Vice President for Marketing, Former Vice President of Human Resources - Communications, and Sales Enablement The Americas FreedomPay Four Seasons Hotels & Resorts Randell Smith Anthony J. 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