HRM practices a predictor for business resilience after layoffs

As retrenchments continue to cloud the foreseeable future of businesses worldwide, new research indicates that some businesses will fare better than others—and it’s all dependent on their type of human resource management system.

In a new study published in the Human Resource Management Journal, researchers found that the ability of an organization to recover after layoffs is directly connected to their HRM system: those that encourage participative, motivation practices will recover more quickly than those that emphasize financial incentives.

Layoffs are a dire reality, occurring increasingly (even before COVID-19) across many industries including travel, hospitality, entertainment and retail, as well as professional services, but the lead author said, HRM research delivers important insights for organizational resilience in times of hardship.

What the researchers say: “In recent weeks we’ve seen many organizations tighten their belts to stay afloat, with some resorting to layoffs in the hope that a ‘leaner and meaner’ structure will help them retain or restore a competitive edge,” he said.

“But the challenge is, the success of a layoff depends on the surviving staff, who inevitably must work harder as the workforce shrinks and, as a result, organizational performance drops.

“Our research shows that businesses with strategic HRM systems focused on participation and collaborative communication practices are far stronger in times of adversity. This is because the nature of these HRM practices have developed a culture of trust. As a result, employees are more likely to feel that they share the responsibility and step up to help management move the organization forward.

“On the other hand, organizations that place a heavy emphasis on financial incentives—that is pay for performance—create a culture of risk. Here, businesses align workers’ financial interests with those of the company, encouraging employers to ‘take a risk’ that their investment (in working hard) will pay off and they will share in the company’s profits.

“Layoffs in these situations tell employees that their risks will not pay off, so when incentives drop, so too does performance.”

Drawing from five years of WERS data (Britain’s flagship survey of employment relations) which included 745 workplaces, the team used cluster analysis to identify workplaces with high-performance workplace systems (HPWS)—systems that use integrated HRM practices such as rigorous selection, training, and teamwork to motivate and maintain high performance—and regression analyses to compare the performance effects of different employment systems.

The researchers found that 60 per cent of workplaces had HPWS and that these outperformed businesses with less-strategic HRM practices. Additionally, it highlighted the benefit of collaborative HRM practices as opposed to financially driven HRM practices.

“High-performance workplace systems send clear messages to employees about what the employer values, motivating employees to focus on those particular parts of their performance, so these produced higher performance than those without such clarity,” the researchers said.

“But, when we assessed the impact of these systems after significant layoffs, we found that businesses that emphasized financial incentives experienced bigger drops in performance, and even five years later, hadn’t yet recovered.

“For organizations, this research shows how important it is to send clear, strategic messages to employees as these will guide and increase performance.

“Yet for those who link HRM practices with financial incentives, there’s an extra warning: while financial incentives work when it’s business as usual, in times of hardship the short- and long-term performance of those organizations is likely to suffer.”

So, what? Up until recently the workplace was like a tribe. It was there that people found their status, their purpose, their sense of community. Even in recent times there was the concept of “a job for life.” You would be looked after, made to feel that you belonged.

Those organizations that have managed to retain some of that sense of belonging will naturally get a better performance from their workforces than others whose only purpose is to enrich shareholders and senior management—even if the employees get some crumbs from the table.

There is a large and growing sense of betrayal that Alicia and I have noticed among the employees in a wide swath of industries worldwide. This is true of those with “good” HRM practices and those that focus on financial incentives. If people are expelled from their tribe—for whatever reason except malfeasance—those that remain will lose faith. If not immediately, then in the longer term. This has been shown in numerous studies dating back to the 1990s.