Turnover & Retention

The Effects of Downsizing on Voluntary Turnover

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In tough economic times, many companies are forced to downsize as a means of staying competitive. While research has determined that company downsizing is related to decreased organizational commitment, an antecedent of voluntary turnover, it has failed to examine the effects of downsizing on voluntary turnover itself.

Why is the relationship between downsizing and voluntary turnover important?

Companies often downsize in an effort to cut costs, and with the cost of replacing an employee at as much as two times the salary of the employee, understanding the link between downsizing and turnover is crucial. Additionally, if downsizing does in fact lead to increased voluntary turnover, the company will likely find itself understaffed after downsizing and subsequent turnover.  Finally, given that a company has chosen to retain the highest performing employees after downsizing, it is safe to assume that the company does not want to lose any of its top performers to voluntary turnover.

Why may downsizing and voluntary turnover be related?

The announcement of downsizing is a jarring event for employees. The psychological contract (the belief that the company will help the employee succeed if the employee does the same for the company) is being violated, even for survivors of downsizing. The shock from the announcement of downsizing can cause an individual to reevaluate his or her job situation. The employee will consider if staying with the company is a desirable situation, or if they can move on to greener pastures. Oftentimes, an employee’s level of organizational commitment (the extent to which an employee is dedicated to the company) is impacted the most by downsizing. It has recently been found that the decrease in organizational commitment resulting from downsizing is the main cause of voluntary turnover, not the actual downsizing event.

What HR practices affect the relationship between downsizing and voluntary turnover?

Ultimately, an employee’s decision to stay following the shock of company downsizing will primarily be based on the expected utility of her options. Contrary to popular belief, utility is not just about dollars and cents, and many activities that increase perceptions of utility also increase organizational commitment. One HR practice that can improve an employee’s perceptions of the utility of staying is focusing on procedural justice (how fair the employee perceives organizational processes for making decisions that affect employees). The most salient of these processes is determining employee pay. When employee pay increases are based on a well-structured, objective, openly disclosed process, employees are likely to perceive higher levels of procedural justice. If an employee perceives the company to be fair prior to the announcement of downsizing, this perception is likely to be maintained in spite of the disappointment of downsizing. Job embeddedness (the extent to which an employee’s life becomes interdependent with the company) is also related to an employee staying after downsizing. While some aspects of embeddedness, like an employee having friends at work, are largely out of the hands of an HR professional, other determinants can be influenced by HR. Offerings like defined benefits plans, paid sabbaticals, on-site childcare, and flextime increase the interdependence of an employee’s life with the company, increasing the utility of remaining with the company after downsizing. Companies with fewer embeddedness practices have almost four times more turnover following downsizing than companies with more embeddedness practices. Employee career development practices also affect the relationship between downsizing and subsequent turnover. A focus on employee career development can be thought of as including the presence of a career resource center, which conducts a formal assessment process for identifying employee strengths and areas for improvement, formal succession planning, and cross-training.  Interestingly, while these practices are beneficial for the employee and indicative of an organizational orientation founded on employee growth, employee career development practices tend to increase the likelihood of an employee leaving following downsizing. Theoretically, this occurs because the employee sees herself as a more attractive candidate on the job market, and believes the utility of leaving is greater than the utility of staying. Companies that engage in more employee career development practices experience about four times more turnover following downsizing than companies that engage in fewer of these practices.

Final thoughts

Companies looking to improve profitability by reducing their headcount should strongly consider the long term consequences before acting and account for subsequent turnover to ensure the company is not left shorthanded. Additionally, company practices that ensure procedural justice and job embeddedness should be in place well before the announcement of downsizing to minimize subsequent turnover. The interaction of employee career development practices is much more difficult to account for. These practices help to ensure company success in the future by preparing qualified employees to move into higher level positions, but also empower the employee to more easily transition to a different company. Ultimately, downsizing may be a necessary decision, but remember, the practices in place before downsizing, influence voluntary turnover afterwards.

Interpretation by:

David Daly

The DeGarmo Group

This was a summary of the research and practice implications from Trevor, C. O., & Nyberg, A. J. (2008). Keeping your headcount when all about you are losing theirs: Downsizing, voluntary turnover rates, and the moderating role of HR practices. Academy of Management Journal, 51(2), 259-276.
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