HUMAN RESOURCE MANAGEMENT IN MALAYSIAN SMES : ISSUES AND

PROBLEMS IN ITS IMPLEMENTATION

Programme : Masters in Business Administration (AA701)

Faculty : Arshad Ayub Graduate Business School

Group : T- AA701

Course : Human Resource Management (HRM 730)

Lecturers Name : Assoc. Prof. Dr. Roshidi Hassan

Table of Content

1 Introduction to SME
New SME Definition
Scope of SMEs
Applicability of Definition
Effective Date
2 Human Resource Management and Its Challenges Among SMEs

3 Challenges faced by SMEs for recruiting new entrants

4 Challenges faced by SMEs during recruitment process

5 Challenges faced by SMEs for hiring and selecting

6 Challenges faced by SMEs for training and developing

7 Challenges faced by SMEs for compensating

8 Conclusion

9 References
Introduction to SME

1. New SME Definition

A review of the definition was undertaken in 2013 and a new SME definition

was endorsed at the 14th NSDC Meeting in July 2013. The definition was simplified

as follows:

Manufacturing: Sales turnover not exceeding RM50 million OR full-time

employees not exceeding 200 workers

Services and other sectors: Sales turnover not exceeding RM20 million

OR full-time employees not exceeding 75 workers

A business can qualify as an SME if it meets either one of the two specified

criteria, namely sales turnover or full-time employees, whichever is lower.

Details of the new definition are as follows:

1.1 Definition by Size of Operation

Microenterprises across all sectors: Sales turnover of less than

RM300,000 OR less than 5 full-time employees.

Table 1 summarises the definition for the small and medium

categories for the respective sectors.

Table 1: Definition by Size of Operation

Category Small Medium

Manufacturing Sales turnover from Sales turnover from RM15

RM300,000 to less than million to not exceeding

RM15 million OR full-time RM50 million OR full-time

employees from 5 to less employees from 75 to not

than 75 exceeding 200

Services & Other Sectors Sales turnover from Sales turnover from RM3

RM300,000 to less than million to not exceeding

RM3 million OR full-time RM20 million OR full-time

employees from 5 to less employees from 30 to not

than 30 exceeding 75

If a business fulfils either one criteria across the different sizes

of operation, then the smaller size will be applicable. For example

if a firms sales turnover falls under microenterprise but employment

falls under small, the business will be deemed as a microenterprise.

1.2 Classification of Sectors

Manufacturing refers to physical or chemical transformation of

materials or components into new products.

Services refer to all services including distributive trade; hotels and

restaurants; business, professional and ICT services; private

 education and health; entertainment; financial intermediation; and

manufacturing related services such as research and development

(R&D), logistics, warehouse, engineering etc.

Others refer to the remaining 3 key economic activities, namely:

(i) Primary Agriculture

Perennial crops (e.g. rubber, oil palm, cocoa, pepper etc.) and

cash crops (e.g. vegetables, fruits etc.)

Livestock

Forestry & logging

Marine fishing

Aquaculture

(ii) Construction

Infrastructure

Residential & non-residential

Special trade

(iii) Mining & quarrying

Classification of economic activities for purposes of definition will be based

on the Malaysian Standard Industrial Classification (MSIC) 2008 codes as

per Annex 1. This is to ensure comparability of data from various sources

and to facilitate data harmonisation across the various providers of SME

statistics. However, the list of activities is not exhaustive and may be

subject to amendments from time to time.

1.3 Details of Qualifying Criteria

Sales turnover refers to total revenue including other incomes.

Full-time employees include all paid workers working for at least 6

hours a day and 20 days a month; or at least 120 hours a month.

Full-time workers also include foreign and contract workers.

However, the definition excludes working proprietors, active business

partners and unpaid family members or friends who are working in

the business and do not receive regular wages.

OR basis means that a business will need to satisfy either one of

the two criteria used in the definition (whichever is lower).

If a business exceeds the threshold set under both criteria for 2

consecutive years (based on its financial year/ accounting period)

then it can no longer be deemed as SMEs. Similarly, a business

that is previously large can become an SME if it fulfils the qualifying

criteria of SMEs for 2 consecutive years.

For statistical purposes, all business establishments including foreign

businesses that fulfil the SME definition will be classified as SMEs.

2. Scope of SMEs

In addition to the qualifying criteria i.e. sales turnover and full-time employees,

there are additional conditions that must be fulfilled to be classified as SMEs:

2.1 Types of Establishment

SMEs refer to only pure business entities registered with the following

bodies:

(i) Companies Commission of Malaysia (SSM) either under the

Registration of Business Act (1956) or Registration of Company Act

(1965) or Limited Liability Partnerships (LLP) Act 2012; or

(ii) Respective authorities or district offices in Sabah and Sarawak; or

(iii) Respective statutory bodies for professional service providers.

2.2 Shareholding Structure

(i) Companies that are public-listed but are in the secondary

bourses such as the ACE market, Malaysia Online Trading Platform

for Unlisted 4 Market (MyULM) or in secondary markets / SME

exchanges / unlisted markets in other countries will still be

considered as SMEs for as long as they fulfil the qualifying criteria.

(ii) Subsidiaries of firms in (i) will also be considered as SMEs for as

long as they fulfil the qualifying criteria.

Subsidiaries refer to entities where the parent company has controlling

power over the entities either via:

The composition of its board of directors; or

 Has more than 50% of its voting power/ share capital (excluding

preference shares); or

Indirectly, through another entity which is a subsidiary that is owned by

the parent company (two level subsidiary). For this, again the conditions in

(i) and (ii) will apply.

These are also pre-conditions to be eligible for Government assistance

programmes. It is also recommended that a minimum local equity of more

than 50% be imposed depending on the objectives of the programmes, in

order to qualify for Government assistance.

3. Applicability of Definition

3.1 The new SME definition is applied to all relevant stakeholders

implementing SME development initiatives. These include Ministries and

agencies at the Federal and State levels (including statutory bodies and

local authorities), regulators as well as financial institutions.

3.2 This is for identification of eligibility status for SME development

programmes, formulation of SME policies as well as compilation of SME

statistics. However, in addition to these critieria, additional eligibility criteria

may be imposed by the implementing institutions depending on the scope

and objectives of the SME development programmes.

 3.3 For purposes of data collection, at all times, the relevant Ministries,

Government Agencies and financial institutions should maintain data on

companies and businesses based on both criteria i.e sales turnover

and number of full-time employees. If for any particular reason the

stakeholders are unable to compile or maintain both these data, then they

should notify the Secretariat.

3.4 All stakeholders involved in SME development programmes are required

to harmonise their data collection procedures based on the size and

sectorial classifications mentioned. This will enable comparability of data

across institutions and provide valuable statistics to better understand the

status, issues and development needs of SMEs across all sectors.

4. Effective Date

The new SME definition will come into effect as of 1 January 2014. This

means that eligibility for SME development programmes and SME statistics compiled

from 2014 onwards shall follow this new definition. All statistics compiled prior to

2014 will remain status quo and will not be affected by the new definition.
Human Resource Management and Its Challenges Among SMEs

Human resource management (HRM) is the process of acquiring, training,

appraising, and compensating employees, and of attending to their labour relations,

health and safety, and fairness concerns. (Dessler, 2017)

By having good HRM practices should therefore provide every SMEs with the

concepts and techniques to perform the personnel aspects of management. These

include; conducting job analyses (determining the nature of each employees job),

planning labour needs and recruiting job candidates, selecting job candidates,

orienting and training new employees, managing wages and salaries (compensating

employees), providing incentives and benefits, appraising performance,

communicating (interviewing, counselling, disciplining), training employees and

developing managers, building employee relations and engagement. (Dessler, 2017)

Human resources are one of the most essential growth indicators for small

and medium enterprises. Having a command of HRM knowledge will help every

SMEs avoid the personnel mistakes while managing. For example, SMEs dont want

To have employees not doing their best

To hire the wrong person for the job

To experience high turnover

To let lack of training undermine companys effectiveness

Some HR issues and problem in its implementation among Malaysian SMEs

are discussed below such as:

Challenges faced by SMEs for recruiting new entrants

Challenges faced by SMEs for hiring and selecting

Challenges faced by SMEs for training and developing

Challenges faced by SMEs for compensating

Challenges faced by SMEs for recruiting new entrants

Limited Openness to New Medium and Channels: SMEs seem to be less inclined

towards adopting modern methods of hiring such as online recruitment which is why

candidates often complain to have less information about the available job

opportunities across the board. The fact that there is no transparent mechanism for

employer and the candidate to engage leads to pitfalls for middle and senior level

recruitment.

Lack of Spirit to Innovate: Innovation is critical for the growth of SMEs and

for grabbing the attention of potential candidates. Candidates should feel the

urge to join the organization because of its capability to innovate and stand out

from the crowd. Next, its the innovation to do things differently for attracting

candidates. For e.g: Many public companies have taken some unconventional

initiatives like improving salaries and salary structures and brought them

closer to the private sector.

Weak Candidate Engagement: SMEs are generally accused of weak

candidate engagement. The job marketplace has undergone a paradigm shift

for the last few years and there is an increasing need for the HRs to spend

time on engaging the workforce. Moreover it is not only the HRs responsibility

to show a candidate what he or she can achieve with the organization. It is a

joint effort of senior management and the HR fraternity. They must enable

engagement with candidates and involve themselves at all levels of interview.

This also gives the organization an opportunity to convey their needs and

expectations better.
 No Clarity on Role and Responsibilities: Role clarity is a major ingredient of

successful recruitment. At a fresher level, most candidates tend to accept the

roles without asking for any clarity and crib later. Therefore, the HR must

ensure to inform them regarding required work, method of execution as well as

procedures, irrespective of the position offered. This is more important else

businesses end up spending too much time due to wrong communications

made at the time of interview.

Extreme Cost Pressures: SMEs are at a disadvantage in their ability to offer

competitive packages. Many SMEs, especially start-ups, usually lack the

funds to attract the calibre of person they need.

Ineffective Screening Process: There is no point hiring without a rigorous

screening. Organizations will be wasting both time and effort in interviewing

incompetent candidates. Most of the time, it has been seen that line managers

assume the responsibilities of HRs in SMEs.

Challenges faced by SMEs for hiring and selecting

Building a strong workforce can be a challenge. The following factors contribute

towards that challenge:

Top talent command premium: Many companies especially the SMEs are

experiencing a typical scenario where the qualified candidates pay

expectations are beyond the companies estimation. Talented people are hard

to find and barely to get. Talented people dont come cheap. They come with a
 price parallel to their skills, knowledge and expertise that they may contribute

to the company. The SMEs could not afford to attract the potential talent to join

in the company due to lack of fund. Fund that they have are more crucial for

other companys operation rather than spending it to the talent. Since the

SMEs are not willing to pay more, then they cant get the right talent.

Wide Job opportunities: Currently, the market place is marked by war for

talent and talent-focused corporate would go to any length to get the right

person. The marketplace is flooded with new age companies (read IT & ITeS

companies) ready to offer more not only in terms of lucrative compensation but

also challenging job profile, cross functional exposure levels, onsite job

opportunities, higher responsibilities, plush work ambience and overall

corporate culture not to speak of world-class brand image that would lend

prestige to people who opt to work for them. Because of this competition, it

seems hard for the SMEs to get the right talent. Knowing that job seekers are

becoming selective and become demanding due to wide job opportunities.

Employer Branding: Corporate branding is a very important aspect for a job

seeker to come on board. Candidates have the luxury to choose whom to work

for since we are in an employee-driven job market. Because, the candidate is

entrusting his career in companys hands for the next few years. Hence, it is

understandable that he is choosy about his prospective employer. It is

preferable for the candidates to enter the established companies rather than

entering the SMEs which they hardly know. Not to tell that these candidates
 are being picky all the times, but with minimal information about SMEs

existence made the SMEs are not put into candidates considerations.

Talent shortage: Talent shortage is the familiar refrain for long and in the

times to come it is going to get acute than ever before. While it is the general

scenario prevalent across all industry sectors, this would be another major

concerns faced by the SMEs. The shortage of talent workers becomes more

critical when new generations (Gen Ys) are not interested to work in SMEs.

They prefer to join and work in those multinational companies (MNCs) and

foreign countries which offer them higher job opportunity and welfare

packages. Besides that, according to Tan Sri Sulaiman Mahbob, trained and

highly skilled talents in Malaysia are now working in many parts of the world,

such as in China, the Middle East, Australia, Hong Kong, Japan and even

Singapore. Therefore, the SMEs is facing serious brain drain and shortage of

qualified employees or talents. It has become the urgent concern and

prioritized agenda for human resource professionals in most of the

organizations. Meanwhile, local and traditional businesses in SMEs who

transform their business line to global market also met with shortage of talents

especially those with languages ability and global working experiences.

Furthermore, numerous foreign SMEs organizations indicated that they are

having problems in investing and expending their business in Malaysia due to

several market reasons such as the lacking of provision of incentives by

government to support facilities development and overcome the shortage of

skilled workers supply.

 Ineffective HR sourcing: In todays uncertainties of economy and business

wave, HR people need to be more aggressive in finding new talent to join in

the organization. Nowadays, the candidates have the power in choosing their

employers. If the organization refuse to stay put and hoping for the candidates

to come, the organization might losing these potential candidates since they

seem can sense the urgency of the organization for not welcoming them or

not. SMEs need to take a hard look at their current HR sourcing strategies.

Challenges faced by SMEs for training and developing

Quality people are assets of the highest calibre for any organization. Many

SMEs, especially start-ups, usually lack the funds and credibility to attract the calibre

of person that they need. Without proper management and excellent staff support, an

organization cannot reach its full potential to grow.

Whilst fund raising can assist in attracting a higher calibre of staff, another

possibility is to incentivise a suitable partner for their skills contribution, even if the

contribution is not on a full time basis. Another option is to employ a consultant to

provide expertise on an affordable basis.

Ineffective Retention Process for the existing manpower: SMEs seldom

offer a detailed orientation programme to new joiners. This leads to a lack of

communication about companys vision and mission. Employees find a lack of

opportunities to learn and grow within the organization.

Failed to develop skills, knowledge and competencies: More management

competencies are required for growth in SMEs compared to larger

 organizations. SMEs failed to develop skills, knowledge and competencies

among workers in the small organization. This is mainly because of financial

constraints and insufficient training. Training is an essential tool for developing

employees and the organizations.

Ignorant of Talents Mobility: Talent retention is essential for organizations,

especially for small medium enterprise (SMEs) in order for their business to

grow. However, attracting, recruiting, engaging, motivating and retaining talent

is always hard for SMEs due to their size and lack of emphasis on staff

management. A lot of SMEs prefer to ignore rather than to solve the talent

retention problems. Wu[6] also revealed that most SMEs believed that Human

Resources issues especially in talent retention would lead to higher cost, so

they did not like to invest and spend more on it. According to Kinear and

Suthrland[7], mobility of the knowledge workers is a major concern of the

organization in this new economy in which an organization may lose their

competitive advantage without talents. Therefore, they should have prepared a

budget to retain the excellent employees in organization.

High Turnover Rate: Turnover is another pressure contributing the barrier for

SMEs growth. The smaller the firm the more of a continuity problem it faces

when there is a turnover. Despite various efforts taken by the organization,

employees turnover rate still remain at the critical level as reported by most of

the researches and surveys. The turnover rate of Generation Y is the highest

group among the workforce and it shows that the loyalty of young generation

(Gen Ys) to the organization is low. Today, job hopping becomes a norm
among Gen Ys which they are mobile and capable of grabbing better position

and benefits. The new generation is hard to express their loyalty to only one

employer in their career.

Meanwhile, employee turnover will incur high direct and indirect costs to the

organization. For instance, the direct costs includes costs expenses and time

to recruit or interview the new employees, premium salary offered to attract the

new candidates and training cost for new employees. The indirect cost which

organizations are mainly concerned about is their losses of intellectual capital

which the knowledge and experiences have flown out the organization. When

talents are leaving, low productivity and performance to the organization will

also be identified as an indirect cost. A few of the researchers survey showed

that the estimated cost of employees turnover is approximately 20%-500% of

those leaving employees annual salary as well as in Malaysia. In line with

that, Kotze and Roodt explained that losing good employees will impact the

company morale such that employees who remain will feel de-motivated and

their job satisfaction will decrease. If this condition continues, they will be

distracted and some of them may tend to follow their colleagues to leave for

the new opportunity. Therefore, the increased employee turnover problem

greatly impacts the business operation whereby it does not only diminished

organization effectiveness but impede the capacity to meet organizations

goals. For the low operation costs industry such as SMEs will be affected

significantly from the consequences brought by the high turnover rate.

Challenges faced by SMEs for compensating

Compensation management is another major concerns faced by the SMEs.

Insufficent of fund is the major concern of SMEs overall operation.

Retention of Gen Ys: Another new critical talent issue alerting the employers

is that many of them are struggling to find effective ways to retain new

generation talent known as Generation Y(Gen Ys) or Millennial who are on the

average age of 35 years old and below in the workforce.

In Malaysia, Gen Ys comprised of over 40% of the countrys population.

As the number of Gen Ys are getting larger, the understanding of the unique

and strength of them is important to integrate them successfully with other

generation in the workplace. They are the new generation of workforce and it

will be a new challenge for the employers in terms of new work behavior and

attitudes, and the tactic to retain them. For instance, the motivation factors

might be different from previous generation like Generation X and Baby

Boomers. They are more demanding, have higher expectation and prefer the

flexibility in the job. Based on The United Kingdoms Chartered Institute of

Personnel and Development (CIPD) 2007 report, half of the employers are

facing difficulties to retain their talented employees especially the new

generation workforce. This is because the Gen Ys want things to be fast and

efficient with modern technology and the growing environment. Besides that,

the Gen Ys generally have higher academic qualification and skill compared to

previous generation. Moreover, Gumz and Dashukewich revealed that Gen Ys

expects greater flexibility in their career and seeks for balance between

families and work. If these values are not satisfied, they will have the intention
to leave the job. Puybaraud argues that Gen Ys are highly ambitious and aim

for high achievement. They know how to plan for their future career path and

develop themselves with different types of training. Thus, organizations need

to understand more about Gen Ys who will be leading and changing the

organizations in the future. Therefore, employers should look for solutions to

narrow the generation gaps in an organization especially in managing their

relationship between each group of generation.

This leads to a less favorable compensation package that they could

afford to offer to the potential candidates especially to the Gen Ys. While on

the other side, the Gen Ys perceive compensation as the most important

driving forces and motivation for them to enter and stay in the organization. It

has also become a new challege for corporate managers who must compete

with these global talented young professionals since the growing numbers of

entry of Gen Ys into the labour market are raising. These new fresher is

expected to bring different values and expectations into the workforce.

Besides that, if their needs are not fulfilled, they will just look elsewhere for

other jobs. Gen Ys are known to be the most demanding group ever, where

salary and benefits being one of the cause why their job satisfaction and

motivation is low. They have the intention to leave the organization easily

when they did not receive any promotion and increment. Unfortunately,

Malaysia is still slow in providing sufficient incentives and benefits to attract

large numbers of talents to contribute to the nation especially in the SMEs. In

addition, the younger workers tend to have more flextime schedules and

balance their time between work, friends and family. The work life balance

principles become a benchmark and conditions when searching a job. When

talent wars become international, many local talents will look for better jobs

opportunities around the world. Hence, this will generate a higher employee

turnover rate.
Conclusion

To summarize, SMEs are required to narrow down on hte right resource after

a meticulous consideration of the position that is required to be filled. HR functions

deal with different dynamics when contributing to SME growth plan. While the

organization plans to follow a successful trajectory, there is a need for both HR and

senior management executives to discover change agents for successful hiring.

SMEs must understand the difference between the traditional and the

conventional approach of Talent Attraction to execute the much required change for

effective hiring. SMEs largely require focusing on recruiting individuals with the

appropriate skills using suitable evaluation procedures that verify the candidates

expertise.
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